Exhibit 13
1997 Symons International Group, Inc. Annual Report
SIG LOGO
1997 Annual Report
[Large SIG logo with three photos]
[small SIG logo]
Corporate Profile
Symons International Group, Inc. owns niche insurance companies principally in
the crop and nonstandard automobile insurance markets. IGF Insurance Company of
Des Moines, Iowa is the fourth largest crop insurer in the United States. Pafco
General Insurance Company of Indianapolis, Indiana and Superior Insurance
Company of Tampa, Florida, combined are the tenth largest provider of
nonstandard automobile insurance in the United States. The crop segment markets
and sells crop insurance to farmers. This is the fastest growing sector of the
commercial insurance market. The nonstandard automobile division markets and
sells insurance through the independent agency system to drivers who are unable
to obtain coverage from insurers at standard or preferred rates. This market is
the fastest growing segment of the personal lines market.
The common stock of Symons International Group, Inc. was initially offered to
the public on November 5, 1996 and trades on The NASDAQ Stock Market's National
Market under the symbol "SIGC".
Table of Contents
Financial Highlights 1
Chairman's Report 2
Selected Financial Data 4
Management's Discussion and Analysis 5
Consolidated Financial Statements 17
Notes to Consolidated Financial Statements 21
Report of Independent Accountants 45
Stockholder Information 46
Board of Directors and Executive Officers 47
Subsidiary and Branch Offices IBC
GRAPH 1993 1994 1995 1996 1997
$88,936 $103,134 $124,634 $305,499 $460,600
Gross Premiums Written By Year
[small SIG logo]
Financial Highlights
(in thousands, except per share data)
For the years ended December 31,
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1997 1996 1995 1994 1993
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Gross premiums written $460,600 $305,499 $124,634 $103,134 $88,936
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Net operating earnings (loss) (1) $11,845 $13,916 $5,048 $2,222 $(244)
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Net earnings (loss) (2) $16,305 $13,256 $4,821 $2,117 $(323)
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Basic operating earnings (loss) per share (1) (2) $1.11 $1.85 $0.72 $0.32 $(0.03)
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Basic earnings (loss) per share $1.56 $1.76 $0.69 $0.30 $(0.05)
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Stockholders' equity $78,363 $60,900 $9,535 $4,255 $2,219
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Return on average equity 21.9% 61.4% 69.9% 65.4% (18.9%)
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Book value per share $7.50 $5.83 $1.36 $0.61 $0.32
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Market value per share (3) $19.22 $16.75 N/A N/A N/A
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Weighted average outstanding shares-basic 10,450 7,537 7,000 7,000 7,000
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(1) Operating earnings and per share amounts exclude the after tax effects of
realized capital gains and losses.
(2) In 1993, the Company recognized an increase to net earnings as a result of a
cumulative effect of a change in accounting principle of $1,175. Earnings and
operating earnings per share excluding this effect were $(0.20).
(3) The Company's shares were first publicly traded on November 5, 1996.
CORPORATE STRUCTURE
[graphic omitted]
Symons International Group, Inc.
Indianapolis, Indiana
("SIG or the "Company")
Wholly-owned subsidiaries
|
----------------------------------
| |
IGF Holdings, Inc. GGS Management, Inc.
("IGFH") ("GGS Management")
| |
----------------------------
| | |
IGF Insurance Company PAFCO General Superior Insurance
("IGF") Insurance Company Company
("Pafco") ("Superior")
|
----------------------------
| |
Superior Guaranty Superior American
Insurance Company Insurance Company
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[small SIG logo]
Chairman's Report to Our Shareholders
SYMONS INTERNATIONAL GROUP, INC. MILESTONES
Greetings:
As has been my practice in the past, I have used "milestones" to provide a
comparison of our development. I have taken a broader approach this year and
carried the results into an appraisal of our efforts as I see it.
I am much encouraged with the future and I feel certain you will be too when you
digest the information assembled below.
YEAR: No. of Employees Gross Revenue Pre-Tax Earnings Net Earnings
1994 240 $106,187 $1,375 $2,117
1995 315 $127,977 $7,440 $4,821
1996 665 $321,518 $23,703 $13,256
1997 764 $492,356 $33,94 $16,305
(1) 1998 800 $730,000 N/A N/A
(1) 1998 information is an estimate based on stated corporate goals.
Revenue is gross premiums, interest and fee income.
While I don't always agree with analysts, generally they do a good job. But as a
person who has been in the business of insurance for more than fifty years, I
have an advantage in assessing the true value of an insurance enterprise over
those that do not have my experience. I have a better tuned antenna and feel
many analysts miss some important aspects of the true worth of an insurance
company.
Over the years I have been the instigator and closer in the sale and purchase of
many insurance entities. The true value of those businesses was somewhat more
than a mere multiplication of the Earnings Per Share, (EPS).
We believe that our companies are grossly undervalued in the market place in
that it does not appreciate the cost and value added for growth in gross
revenue. To help you understand what I mean, let's look at values paid by
knowing buyers for recent acquisitions in fields of insurance similar to our
companies.
Note that the price paid for these entities doesn't follow a straight
multiplication of EPS, in fact the most constant number that parallels the price
is the Gross Written Premium.
Premium
Mean Purchase Trailing to Purchase
Premiums Price EPS Multiple Price Ratio
Omni Insurance $140M $185M 30 132%
(sold to Hartford)
10/16/97
Guaranty National $510M $469M 16 91%
(sold to Orion Capital
9/18/97
Titan $172M $240M 17 140%
(sold to U.S.F.&G.
8/8/97
Integon $783M $519M N/A 62%
(sold to G.M.A.C. ----- ----- --- ---
6/3/97
Average 21 88%
== ===
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[small SIG logo]
In today's world, the value of an insurer is more closely linked to its gross
written premiums. Depending on the class of business, this value multiple should
be between 75% and 100% of the insurers premium volume. We have outperformed all
the above companies in every worthwhile category. Yet, I ponder why no value has
been attributed to our $150M of premium growth in 1997.
In the past several years we have acquired businesses in the industry sectors
that we felt had the most potential for growth: Crop insurance (the fastest
growing segment of the Commercial insurance industry) and Non-Standard
automobile insurance (the growth leader in the Personal line component). You
will note that our growth parallels this pattern and that we have consistently
demonstrated our ability to grow faster than our industry peer group.
Let me recall for you our two most recent acquisitions, Superior Insurance
Group, and CNA Crop Book. When we bought Superior Insurance Group on May 1,
1996, it was coming off a year in which it had produced $95M of Gross Written
Premiums and earned about $5M of pre-tax income. For 1997, Superior wrote $250M
of premiums and earned a pre-tax profit of $20M. This growth came through the
repositioning of Superior in its markets and changing the way it did business.
This rate of growth is continuing in 1998.
On March 2, 1998 we took over CNA's book of MPCI and Crop Hail insurance. In
return, CNA gets a share of our crop reinsurance business that would otherwise
be placed with other reinsurers. We feel we can use our marketing expertise and
varied products to grow this approximately $110M of business in the same way we
have grown our previous acquisition in the past, outpacing other crop insurers
in the process.
Over the last 5 years, we have seen our performance as follows:
annual gross revenue average compound growth: 43%
annual net income average compound growth: 148%
annual ROE average compound growth: 40%
This growth and performance is the result of attracting a competent work force,
excelling in niche markets and making acquisitions that others look at and say
are insightful purchases (oddly, only after we have turned these acquisitions
into great producers). We are continuing to look at growth and acquisitions with
enthusiasm.
During the second half of 1997, we retained Donaldson, Lufkin & Jenrette ("DLJ")
to lead a $135M, thirty-year issue of Trust Preferred Securities. As part of
this successful issue, we did a road show to tell the story of our company. DLJ
prepared the presentations for that road show and commented, among other
positive statements, that we have "a proven management team." This team has the
ability, experience and the tools to continue our growth and performance into
the future.
The commendations on the quality of our personnel by the firm of Donaldson,
Lufkin & Jenrette is self evident and anything I might add on the professional
standing of our managers and employees would be redundant. I would be remiss
however if I didn't thank them all for their efforts and professional interest
in the company's welfare and success.
It has been said that a business is, at its inception, "Desperate," then
"Honest" and finally "Respectable." We have worked hard to reach
"respectability" and it is this that motivates us. We have made profits for our
shareholders and have greatly enhanced the company's corporate governance
function. Our growth in the business of insurance, measured by premium income,
profits and professionalism has been outstanding. This has come about primarily
through the efforts and dedication of our personnel and I extend to all of them
the thanks of the Board of Directors.
We have two public companies, Goran Capital Inc. and Symons International Group
Inc., and as a public organization we must maintain larger and more diverse
Boards. As Chairman, I rely on these gentlemen for their help and advice. Our
meetings are often lengthy and diverse and we wrestle with many additional
factors because the company is growth oriented. I wish to thank each of these
gentlemen for their contribution over the past year and assure them that their
efforts are greatly appreciated.
Thanks Board, thanks employees.
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[small SIG logo]
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
Years Ended December 31,
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SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
- --------------------------------------------------------------------------
OF SYMONS INTERNATIONAL GROUP, INC.
The selected consolidated financial data presented below is derived from the
consolidated financial statements of the Company and its Subsidiaries and should
be read in conjunction with the consolidated financial statements of the Company
and the notes thereto, included elsewhere in this Report.
Consolidated Statement of Operations Data:
(in thousands, except per share amounts and ratios)
1997 1996 1995 1994 1993
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Gross Premiums Written $ 460,600 $ 305,499 $ 124,634 $ 103,134 $ 88,936
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Net Premiums Earned 271,814 191,759 49,641 32,126 31,428
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Fee Income 20,309 9,286 2,170 1,632 886
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Net Investment Income 11,447 6,733 1,173 1,241 1,489
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NET EARNINGS (LOSS) $ 16,305 $ 13,256 $ 4,821 $ 2,117 $ (323)
======= ======= ======= ======= =====
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Per Common Share Data:
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Basic Earnings (Loss) Before Extraordinary Item $ 1.63 $ 1.76 $ 0.69 $ 0.30 $ (0.05)
------- ------ ------ ----- -----
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BASIC NET EARNINGS (LOSS) $ 1.56 $ 1.76 $ 0.69 $ 0.30 $ (0.05)
======= ====== ====== ===== ======
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Basic Weighted Average Shares Outstanding 10,450 7,537 7,000 7,000 7,000
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GAAP Ratios:
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Loss and LAE Ratio 78.0% 71.5% 72.5% 82.4% 79.8%
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Expense Ratio 23.0 24.0 18.6 21.7 31.5
---- ---- ---- ---- ---
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COMBINED RATIO 101.0% 95.5% 91.1% 104.1% 111.3%
===== ==== ==== ===== =====
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Consolidated Balance Sheet Data:
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Investments $ 216,518 $ 168,137 $ 25,902 $ 18,572 $ 21,497
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Total Assets 529,875 344,679 110,516 66,628 81,540
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Losses and Loss Adjustment Expenses 136,772 101,719 59,421 29,269 54,143
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Total Debt or Preferred Securities 135,000 48,000 11,776 10,683 9,341
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Total Shareholders Equity 78,363 60,900 9,535 4,255 2,219
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Book Value Per Share $ 7.50 $ 5.83 $ 1.36 $ 0.61 $ 0.32
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Statutory Capital and Surplus:
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Pafco $ 19,924 $ 18,112 $ 11,875 $ 7,848 $ 8,132
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IGF $ 42,809 $ 29,412 $ 9,219 $ 4,512 $ 2,789
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Superior $ 65,146 $ 57,121
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The statutory surplus of Pafco includes Pafco's share of IGF's statutory surplus
prior to April 30, 1996. Pafco owned the following percentages of IGF at
December 31, 1994, 98.8%; 1995, 100%. At April 30, 1996, Pafco transferred IGF
to SIG. Prior to the transfer, IGF also paid a dividend in the form of cash of
$7,500,000 and a promissory note of $3,500,000 which have been repaid in full.
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[small SIG logo]
[photographs of automobiles on freeway down left margin]
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF THE COMPANY
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Overview
Symons International Group, Inc. (the "Company" or "SIG") is a 67% subsidiary of
Goran Capital Inc. ("Goran"). Prior to the Company's Initial Public Offering
(the "Offering") on November 5, 1996, it was a wholly-owned subsidiary of Goran.
The Company underwrites and markets nonstandard private passenger automobile
insurance and crop insurance.
Acquisitions and Public Offerings
On April 30 ,1996 the Company purchased the operations of Superior
Insurance Company for $66.6 million in cash (the "Acquisition"). Funds for the
Acquisition were provided from funds affiliated with Goldman Sachs and a bank
term loan of $48 million. Both Goldman Sachs and the bank term loan were taken
out in August 1997.
On November 5, 1996 the Company issued 3,450,000 shares in an initial
public offering of 33% of its stock at $12.50 per share.
On November 12, 1997 the Company issued $135 million of Trust Preferred
Securities at 9.50%. The proceeds of this offering were used to purchase Goldman
Sachs minority interest share of the nonstandard automobile operations, repay
the term loan used to acquire Superior and provide capital to the nonstandard
automobile division for future growth. The Preferred Securities carry a 30 year
term with a noncallable period of 10 years. Distributions are payable
semiannually at 9.5% with all principal paid at maturity. The Company also has
the ability to forego distributions for periods of up to five years, although it
has no intention to do so, and the Preferred Securities have limited covenants.
The Company believed the time was proper to obtain the benefit of 100% of the
nonstandard automobile operations, provide longer term financing at favorable
terms and provide additional capital for future growth.
Nonstandard Automobile Insurance Operations
GGS Holdings, through its wholly-owned subsidiaries, Pafco and Superior,
is engaged in the writing of automobile insurance for "nonstandard risks."
Nonstandard insureds are those individuals who are unable to obtain insurance
through standard market carriers due to factors such as poor premium payment
history, driving experience, record of prior accidents or driving violations,
particular occupation or type of vehicle. Premium rates for nonstandard risks
are higher than for
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[small SIG logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS
standard risks. Nonstandard policies have relatively short
policy periods and low limits of liability. Due to the low limits of coverage,
the period of time that elapses between the occurrence and settlement of losses
under nonstandard policies is shorter than many other types of insurance. The
nonstandard automobile market is the fastest growing sector of the personal
lines market.
Crop Insurance Operations
General
Crop insurance consists of three main products. Hail insurance, which is
controlled by the private insurance industry, receives no subsidy from the
government. Multi-Peril Crop Insurance ("MPCI"), is a government sponsored
product, administered through the Federal Crop Insurance Corporation ("FCIC").
Named perils insurance covers farmers for specific risks to specific crops.
Farmers who purchase insurance receive subsidies to reduce their cost and
provide protection for major catastrophic loss. When a farmer wants to borrow
money to buy his seed, the bank wants insurance on the harvest so the bank knows
the loan can be repaid either through normal harvest or through an insurance
policy covering the yield on the crop. There are many types of coverages and
percentages that farmers can purchase. The Company works with independent
agents to meet the insurable needs of the farmer which includes the best
coverage and premium for the farm. The government supports this effort through
commissions it pays the Company to do this work and through premium subsidy for
the farmer's insurance costs. The government also provides back-up risk
protection to the 18 or so crop insurance providers in the event of major loss
Based on the results for any given year, the Company and the government share
in the results of profit and loss. In order to protect IGF from the loss part
of this equation, IGF buys third party reinsurance to reduce the downside from a
loss year.
Certain Accounting Policies for Crop Insurance Operations
The majority of the Company's crop insurance business consists of MPCI.
MPCI is a government-sponsored program with accounting treatment which differs
in certain respects from more traditional property and casualty insurance lines.
Farmers may purchase "CAT Coverage" (the minimum available level of MPCI
coverage) upon payment of a fixed administrative fee of $50 per policy (the "CAT
Coverage Fee") instead of a premium. This fee is included in other income.
Commissions paid to agents to write CAT policies are partially offset by the CAT
Coverage Fee. For purposes of the profit-sharing formula under the MPCI program
referred to below, the Company is credited with an imputed premium (its "MPCI
Imputed Premium") for all CAT Coverage policies it sells, determined in
accordance with the profit-sharing formula established by the FCIC. For income
statement purposes under GAAP, Gross Premiums Written consist of the aggregate
amount of premiums paid by farmers for "Buy-up Coverage" (MPCI coverage in
excess of CAT Coverage), and any related federal premium subsidies, but do not
include any MPCI Imputed Premium credited on CAT Coverage. By contrast, Net
Premiums Written and Net Premiums Earned do not include any MPCI Premiums or
premium subsidies, all of which are deemed to be ceded to the United States
Government as reinsurer. The Company's profit or loss from its MPCI business is
determined after the crop season ends on the basis of a profit-sharing formula
established by federal regulation and the FCIC. For GAAP income statement
purposes, any such profit or loss sharing earned or payable by the Company is
treated as an adjustment to commission expense and is included in policy
acquisition and general and administrative expenses. Amounts receivable from the
FCIC are reflected on the Company's consolidated balance sheet as reinsurance
recoverables.
The Company also receives from the FCIC (i) an expense reimbursement
payment equal to a percentage of Gross Premiums Written for each Buy-up Coverage
policy it writes (the "Buy-up Expense Reimbursement Payment"),
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[small SIG logo]
[photographs of crops down right margin]
(ii) an LAE reimbursement payment equal to 13.0% of MPCI Imputed Premiums for
each CAT Coverage policy it writes (the "CAT LAE Reimbursement Payment")
and (iii) a small excess LAE Reimbursement Payment of two hundredths of one
percent (0.02%) of MPCI Retention to the extent the Company's MPCI Loss Ratios
on a per state basis exceed certain levels (the "MPCI Excess LAE Reimbursement
Payment"). For GAAP income statement purposes, the Buy-up Expense Reimbursement
Payment is treated as a contribution to income and reflected as an offset
against policy acquisition and general and administrative expenses. The CAT LAE
Reimbursement Payment and the MPCI Excess LAE Reimbursement Payment are, for
income statement purposes, recorded as an offset against LAE, up to the actual
amount of LAE incurred by the Company in respect of such policies, and the
remainder of the payment, if any, is recorded as other income.
In 1996, the Company instituted a policy of recognizing (i) 35% of its
estimated MPCI Gross Premiums Written for each of the first and second quarters,
(ii) commission expense on MPCI Gross Premiums Written at contractual rates and
(iii) Buy-up Expense Reimbursement at the contractual rate of MPCI Gross
Premiums Written along with normal operating expenses incurred in connection
with premium writings. In the third quarter, if a sufficient volume of
policyholder acreage reports have been received and processed by the Company,
the Company's policy is to recognize MPCI Gross Premiums Written for the first
nine months based on a re-estimate. If an insufficient volume of policies have
been processed, the Company's policy is to recognize 20% of its full year
estimate of MPCI Gross Premiums Written in the third quarter. The remaining
amount of MPCI Gross Premiums Written is recognized in the fourth quarter, when
all amounts are reconciled. In prior years, recognition of MPCI Gross Premiums
Written was 30%, 30%, 30% and 10%, for the first, second, third and fourth
quarters, respectively. Commencing with its June 30, 1995 financial statements,
the Company also began recognizing MPCI underwriting gain or loss during the
first, second and third quarters, reflecting the Company's best estimate of the
amount of such gain or loss to be recognized for the full year, based on, among
other things, historical results, plus a provision for adverse developments. In
the fourth quarter, a reconciliation amount is recognized for the underwriting
gain or loss based on final premium and loss information.
-7-
[small SIG logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS
Selected Segment Data of the Company
The following table presents historical segment data for the Company's
nonstandard automobile and crop insurance operations. This data does not reflect
results of operations attributable to corporate overhead, interest costs and
amortization of intangibles nor does it include the results of operations of
Superior prior to May 1, 1996.
Year ended December 31,
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Nonstandard - Automobile Insurance Operations:
(in thousands, except ratios) 1997 1996 1995
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Gross premiums written $323,915 $187,176 $49,005
======= ======= ======
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Net premiums written $256,745 $186,579 $37,302
======= ======= ======
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Net premiums earned $251,020 $168,746 $34,460
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Fee income 15,515 7,578 1,787
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Net investment income 10,969 6,489 624
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Net realized capital gain (loss) 9,462 (1,014) (508)
----- ------ ----
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Total Revenues 286,966 181,799 36,363
------- ------- ------
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Losses and loss adjustment expenses 195,900 124,385 25,423
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Policy acquisition and general and administrative expenses 72,463 46,796 12,929
------ ------ ------
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Total Expenses 268,363 171,181 38,352
------- ------- ------
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Earnings (loss) before income taxes $18,603 $10,618 $(1,989)
====== ====== ======
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GAAP RATIOS (Nonstandard Automobile Only)
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Loss ratio 70.2% 65.1% 65.8%
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LAE ratio 7.8% 8.6% 8.0%
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Expense ratio, net of billing fees 22.7% 23.2% 32.3%
---- ---- ----
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Combined ratio 100.7% 96.9% 106.1%
===== ==== =====
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Crop Insurance Operations:
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Gross premiums written $126,401 $110,059 $70,374
======= ======= ======
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Net premiums written $20,796 $23,013 $11,608
====== ====== ======
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Net premiums earned $20,794 $23,013 $11,608
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Fee income 4,764 1,672 384
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Net investment income 191 181 674
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Net realized capital gain (loss) (18) (1) 164
--- -- ---
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Total Revenues 25,731 24,865 12,830
------ ------ ------
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Losses and loss adjustment expenses 16,185 12,724 8,629
- -----------------------------------------------------------------------------------------------------------------------
Policy acquisition and general and administrative expenses(1) (11,551) (6,095) (7,466)
- -----------------------------------------------------------------------------------------------------------------------
Interest and amortization of intangibles 235 551 627
--- --- ---
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Total Expenses 4,869 7,180 1,790
----- ----- -----
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Earnings before income taxes $20,862 $17,685 $11,040
====== ====== ======
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Statutory Capital and Surplus:
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Pafco $19,924 $18,112 $11,875
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IGF 42,809 29,412 9,219
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Superior 65,146 57,121 49,277
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(1) Negative crop expenses are caused by inclusion of MPCI expense
reimbursements and underwriting gain
-8-
[small SIG logo]
[photographs of cars on freeway down left margin]
Results of Operations
Overview
1997 Compared To 1996
The Company recorded net earnings of $16,305,000 or $1.56 per share (basic),
respectively in 1997. This is approximately a 23.0% increase in net earnings
from 1996 comparable amounts of $13,256,000 or $1.76 per share (basic). The
reduction in earnings per share reflects the increase in the weighted average
shares outstanding from the Company's IPO in November 1996. The nonstandard
automobile insurance segment demonstrated improved earnings due to continued
premium growth, improved expense ratios and higher realized gains from
investment sales. Premium growth in nonstandard automobile was generated from
increased pressure on uninsured motorists to obtain insurance, expansion into
new states and increased market share penetration. During 1997, the Company
increased reserves for both prior and current accident years at Pafco. The total
increase for prior accident years at Pafco was approximately $7.5 million. The
improvement in crop insurance earnings relates to growth in market share and
favorable underwriting results. Growth in market share occurred in all product
lines for crop and is the result of improved marketing and agent service
efforts. Record underwriting results are due to favorable crop conditions and
continued improvement in risk selection.
1996 Compared To 1995
Net earnings and earnings per share increased 175.0% to $13,256,000 and 155.1%
to $1.76 (basic) in 1996 from $4,821,000 and $0.69 (basic) in 1995. Improved
earnings in 1996 were attributable to both the nonstandard automobile and crop
segments. The nonstandard automobile segment benefitted from significant premium
growth from the acquisition of Superior, elimination of quota share reinsurance
and internal growth. The nonstandard automobile segment also benefitted from
lower loss and expense ratios due to improved claims management, introduction of
multi-tiered products and operating efficiencies through reengineering,
management changes and gains from technological advancements. The crop insurance
segment also benefitted from significant premium growth in both crop hail and
MPCI premiums. The crop insurance segment's profitability was enhanced by a
lower crop hail loss ratio and improved MPCI underwriting gains.
Years Ended December 31, 1997 and 1996
Gross Premiums Written
Consolidated Gross Premiums Written increased 50.8% in 1997 due to growth
in both the nonstandard auto and crop segments. Gross Premiums Written for the
nonstandard auto segment increased 73.1% in 1997. While a portion of this
increase relates to four additional months of premium in 1997 of Superior,
additional premium growth relates to internal growth due to improved service,
certain product improvements, tougher uninsured motorist laws in states such as
California and Florida and entrance into new states such as Nevada and Oregon.
Such increase was primarily due to volume rather than rate increases, although
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[small SIG logo]
the Company adjusts rates on an ongoing basis. Gross Premiums Written for the
crop segment increased 14.8% in 1997. Such increase was due to continued
industry privatization and aggressive marketing efforts, resulting in continued
increase in market share. Remaining gross written premiums represent commercial
business which is ceded 100% to an affiliate.
Net Premiums Written
Net Premiums Written increased in 1997 as compared to 1996 due to the
growth in Gross Premiums Written offset by quota share reinsurance.
In 1997, the Company ceded $67,170,000 of nonstandard automobile premiums
as part of a quota share treaty instituted January 1, 1997. For the first three
quarters of 1997 the Company ceded 20% of nonstandard automobile premiums and
ceded 25% of such premiums in the fourth quarter. In 1998 the Company plans to
cede 10% of nonstandard automobile premiums with adjustments as needed for
surplus leverage. No such treaty was in effect during 1996. In 1997, the Company
ceded $15,640,000 of crop hail premiums as part of a 40% quota share treaty
instituted January 1, 1997. In 1996, crop hail premiums were ceded at a rate of
10%.
Net Premiums Earned
Net Premiums Earned increased in 1997 as compared to the prior year,
reflecting the strong growth in Gross Written Premiums offset by the effects of
the nonstandard automobile and crop hail quota share treaties. Net premiums
earned to net premiums written for the nonstandard automobile segment was 97.8%
in 1997 as compared to 90.4% in 1996. The increase in the earned ratio is due to
higher premium growth earlier in 1997.
Fee Income
Fee income increased $11,023,000 in 1997 compared to 1996. Such increase
was due to billing fee income on nonstandard automobile business from an
increase in in-force policy count. There was also an increase in the receipt of
CAT Coverage Fees and CAT LAE Reimbursement Payments due to higher premium
volume.
Net Investment Income
Net investment income increased $4,714,000 in 1997 compared to 1996. Such
increase was due partially to four additional months of investment income from
Superior but also due to greater invested assets resulting from premium growth
and higher profitability.
Net Realized Capital Gains (Loss)
Realized gains of $9,444,000 in 1997 were due to the significant strength
of the equity markets in 1997 and the Company's position to realize gains as
securities had reached targeted pricing levels.
Losses and LAE
The Loss and LAE Ratio for the nonstandard automobile segment was 78.0%
for 1997 as compared to 73.7% for 1996. The Crop Hail Loss Ratio in 1997 was
77.8% compared to 55.3% in 1996. The increase in the Loss and LAE Ratio for the
nonstandard automobile segment reflects the recent growth in premium volume in
an effort to increase market share and improve economies of scale, increased
physical damage severity costs and certain pending rate increases. The Company
increased 1996 and prior nonstandard automobile reserves at Pafco by $6.0
million in the first two quarters and $1.5 million in the fourth quarter which
increased the Loss and LAE Ratio 3.0% in 1997. Deficient reserve development at
Superior was approximately $2.5 million in 1997. The increase in the crop hail
loss ratio is the result of storm damage in the third quarter in certain eastern
states on new business obtained in 1997. The Company continues to aggressively
address ways to decrease the nonstandard automobile loss ratios including
elimination of unprofitable agents, rate increases and improved claims
management and closure rates. The Company is also reviewing the pricing of the
crop hail business to improve future loss experience.
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses have increased
as a result of the increased volume of business produced by the Company. Policy
acquisition and general and administrative expenses rose to $62,631,000 or 23.0%
of Net Premiums Earned for 1997 compared to $42,013,000 or 21.9% of Net Premium
Earned in 1996. Such increase was due to a higher mix of nonstandard automobile
premiums in 1997 as compared to 1996. The Expense Ratio, net of billing fees,
for the nonstandard automobile segment improved to 22.7% for 1997 as compared to
23.2% for 1996.
Due to the accounting for the crop insurance
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segment, operating expenses for 1997 includes a contribution to earnings of
$11,551,000 as compared to $6,095,000 for 1996. Such increase was due to
greater Buy-up Expense Reimbursement Payments and MPCI underwriting gain due to
increased premium volumes and more favorable underwriting results.
Amortization of Intangibles
Amortization of intangibles includes goodwill from the acquisition of
Superior, additional goodwill from the acquisition of the minority interest
position in GGSH, debt or preferred security issuance costs and organizational
costs. The increase in 1997 reflects the effects of the Preferred Securities
Offering and the purchase of the minority interest position in GGSH.
Interest Expense
Interest expense primarily represents interest incurred since April 30,
1996 on the GGS Senior Credit Facility. The GGS Senior Credit Facility was
repaid with the proceeds from the Preferred Securities Offering.
Income Tax Expense
Income tax expense was 35.3% of pre-tax income for 1997 as compared to
33.9% in 1996. The increased rate is due to the higher amount of nondeductible
goodwill amortization expense.
Distributions on Preferred Securities
Distributions on Preferred Securities are calculated at a rate of 9.5% net
of federal income taxes from the offering date of August 12, 1997.
Years Ended December 31, 1996 and 1995
Gross Premiums Written
Gross Premiums Written in 1996 increased to $305,499,000 from $124,634,000
in 1995 reflecting a 282% increase in nonstandard automobile insurance and an
increase of 56.4% in crop insurance. Other Gross Premiums Written consist of
premiums on commercial business which were 100% ceded to Granite Re Insurance
Company Ltd. ("Granite Re") effective January 1, 1996. The increase in
nonstandard automobile Gross Premiums Written was due to the Acquisition, which
generated Gross Premiums Written of $118,661,000 subsequent to the Acquisition,
as well as a 21% increase in policies in-force issued by Pafco. The increase in
Pafco policies in-force primarily resulted from improved service and product
improvements. The increase in crop insurance Gross Premiums Written was
primarily due to (i) farmers electing higher percentage of crop price levels to
be insured under MPCI Buy-up Coverages, (ii) an increase in MPCI policies
in-force, and (iii) increase in the number of acres insured, together with an
increase of $10,990,000, or 64.8%, in crop hail premiums in 1996 compared to
1995.
Net Premiums Written
The Company's Net Premiums Written in 1996 increased 292.1% to
$209,592,000 from $53,447,000 in 1995 due to the Acquisition, which generated
Net Premiums Written for Superior of $118,298,000 subsequent to the Acquisition,
and the increase in Gross Premiums Written in Pafco's nonstandard automobile
insurance business. In addition, the increase in Net Premiums Written resulted
from the Company's election not to renew, as of January 1, 1996, its 25% quota
share reinsurance on its nonstandard automobile business. As a result of
increases over time in its statutory capital, the Company determined that it no
longer required the additional capacity provided by this coverage in order to
maintain acceptable premium to surplus ratios. Since all MPCI premiums are
reported as 100% ceded, MPCI Gross Premiums Written have no effect on Net
Premiums Written.
Net Premiums Earned
The Company's Net Premiums Earned in 1996 increased 286.3% reflecting the
increase in Net Premiums Written. The ratio of Net Premiums Earned to Net
Premiums Written in 1996 decreased to 90.4% from 92.4% in 1995 due to growth in
Net Premiums Written in 1996 exceeding growth in Net Premiums Written in 1995.
Fee Income
The Company's fee income in 1996 increased 327.9% due principally to (i)
billing fee revenue of $4,655,000 at Superior subsequent to the Acquisition,
(ii) increased billing fee revenue at Pafco of $998,000 from nonstandard
automobile insurance policies, resulting from the increase in the in-force
policy count described above, and an increase in fees charged per installment in
late 1995, and
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(iii) increased CAT Coverage Fees and CAT LAE Reimbursement
Payments resulting from the introduction of CAT Coverages in the Federal Crop
Insurance Reform Act of 1994 (the "1994 Reform Act").
Net Investment Income
The Company's net investment income in 1996 increased 474.0%. This
increase was due primarily to the investment earnings of $4,996,000 at Superior
subsequent to the Acquisition. Also contributing to the increase in net
investment income is an increase in average invested assets (not including
Superior) to $30,911,000 in 1996 from $22,653,000 in 1995.
Net Realized Capital Gain (Loss)
The Company recorded a net realized capital loss from the sale of
investments of $1,015,000 in 1996 compared to a net realized capital loss from
the sale of investments of $344,000 in 1995. The net realized capital loss in
1996 was the result of sales of securities to shorten the portfolio's overall
maturity to provide a better duration match with claims payments.
Losses and LAE
The Loss and LAE Ratio for the nonstandard automobile segment in 1996 was
73.7% as compared to 73.8% in 1995. The reduction in the Loss and LAE Ratio for
1996 was a function of rate increases and improved claim closure ratios. Crop
hail loss ratios decreased in 1996 to 55.3% from 74.3% in 1995 due to more
favorable weather conditions and a broader geographic expansion of premiums
which serves to reduce exposure.
Policy Acquisition and General and Administrative Expenses
The Expense Ratio for the nonstandard automobile segment decreased to
29.6% in 1996 from 37.5% in 1995. Excluding interest on the Acquisition debt and
amortization of goodwill and other intangibles associated with the Acquisition
would reduce this ratio to 27.7% in 1996. This decrease was due to several
factors including: (i) lower commission expense at Superior through utilization
of multi-tier products, (ii) lower staff expenses as a result of higher
utilization and work flow re-engineering, and (iii) technological advancements
in the underwriting, premium processing and claims areas. As a result of the
accounting for the crop insurance segment, such segment experienced a
contribution to income reflected in the policy acquisition and general and
administrative expense line item of $6,095,000 in 1996 compared to a
contribution to income of $7,466,000 in 1995. This decrease in contribution
resulted from a combination of several factors. The primary difference is the
decrease in ceding commission income of $2,036,000 which is due to only a 10%
quota share agreement for crop hail in 1996 versus a 25% quota share in 1995.
Other items include a commission expense increase of $6,217,000 due to higher
premium writings and an increase in other operating expenses of $4,153,000. This
net increase in expense of $10,370,000 was reduced by an increase of $8,490,000
in Buy-up Expense Reimbursement and an increase in the MPCI underwriting gain of
$2,624,000.
Interest Expense
The Company's interest expense in 1996 increased to $3,938,000 from
$1,248,000 in 1995 due primarily to interest of $2,774,000 on the $48 million
indebtedness incurred by a subsidiary of GGSH to partially fund the Acquisition
(the "GGS Senior Credit Facility").
Income Tax Expense
The effective tax rate in 1996 reflects a 33.9% provision compared to a
35.2% provision in 1995. The reduction in the effective tax rate is due to
higher tax-exempt interest and dividend income.
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[photograph of wheat down left margin]
Liquidity and Capital Resources
The primary source of funds available to the Company are dividends from
its primary subsidiaries, IGF, IGF Holdings and GGS Management. The Company also
receives $150,000 quarterly pursuant to an administration agreement with IGF to
cover the costs of executive management, accounting, investing, marketing, data
processing and reinsurance.
GGS Management collects billing fees charged to policyholders of Pafco and
Superior who elect to make their premium payments in installments. GGS
Management also receives management fees under its management agreement with
Pafco and Superior. When the Florida Department of Insurance ("Florida
Department") approved the acquisition of Superior by GGS Holdings, it prohibited
Superior from paying any dividends (whether extraordinary or not) for four years
from the date of Acquisition without the prior written approval of the Florida
Department. Extraordinary dividends, within the meaning of the Indiana Insurance
Code, cannot be paid by Pafco without the prior approval of the Indiana
Insurance Commissioner. The management fees charged to Pafco and Superior by GGS
Management are subject to review by the Indiana and Florida Departments of
Insurance.
The nonstandard automobile insurance subsidiaries' primary source of funds
are premiums, investment income and proceeds from the maturity or sale of
invested assets. Such funds are used principally for the payment of claims,
operating expenses (primarily management fees), commissions, dividends and the
purchase of investments. There is variability to cash outflows because of
uncertainties regarding settlement dates for liabilities for unpaid losses.
Accordingly, the Company maintains investment programs intended to provide
adequate funds to pay claims without forced sales of investments. As claim
payments tend to lag premium receipts and due to the growth in premium volume
the Company has experienced an increase in its investment portfolio and has not
experienced any problems with meeting its obligations for claims payments or
management fees.
As of December 31, 1997, IGF has the ability to pay $13,404,000 in
dividends without prior regulatory approval.
Cash flows in the Company's MPCI business differ from cash flows from
certain more traditional lines. The Company pays insured losses to farmers as
they are incurred during the growing season, with the full amount of such
payments being reimbursed to the Company by the federal government within three
business days. MPCI premiums are not received from farmers until covered crops
are harvested. Such premiums are required to be paid in full to the FCIC by the
Company, with interest, if not paid by a specified date in each crop year.
During 1997, IGF continued the practice of borrowing funds under a
revolving line of credit to finance premium payables to the FCIC on amounts not
yet received from farmers (the "IGF Revolver"). The maximum borrowing amount
under the IGF Revolver was $6,000,000 until July 1, 1996, at which time the
maximum borrowing amount increased to $7,000,000. The IGF Revolver carried a
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weighted average interest rate of 9.7%, 8.6%, and 8.75% in 1995, 1996 and 1997,
respectively. Payables to the FCIC accrue interest at a rate of 15%, as do the
receivables from farmers. By utilizing the IGF Revolver, which bears interest at
a floating rate equal to the prime rate plus .25%, IGF avoids incurring interest
expense at the rate of 15% on interest payable to the FCIC while continuing to
earn 15% interest on the receivables due from the farmer. Subsequent to December
31, 1997, IGF had reduced its contractual borrowing rate to prime minus .75%.
The IGF Revolver contains certain covenants which restrict IGF's ability to (i)
incur indebtedness or (ii) make loans to others, including affiliates. The IGF
Revolver also contains other customary covenants which, among other things,
restricts IGF's ability to participate in mergers, acquire another enterprise or
participate in the organization or creation of any other business entity. At
December 31, 1997, $2,918,000 remains available under the IGF Revolver.
On August 12, 1997, the Company issued $135 million in Trust Originated
Preferred Securities (the "Preferred Securities Offering"). These Preferred
Securities were offered through a wholly-owned trust subsidiary of the Company
and are backed by Senior Subordinated Notes to the Trust from the Company. These
Preferred Securities were offered under Rule 144A of the SEC and, pursuant to
the Registration Rights Agreement executed at closing, the Company filed a Form
S-4 Registration Statement with the SEC on September 16, 1997 to effect the
Exchange Offer. The S-4 Registration Statement was declared effective on
September 30, 1997 and the Exchange Offer successfully closed on October 31,
1997. The proceeds of the Preferred Securities Offering were used to repurchase
the remaining minority interest in GGSH for $61 million, repay the balance of
the GGS Senior Credit Facility of $44.9 million and the Company expects to
contribute the balance, after expenses, of approximately $24 million to the
nonstandard automobile insurers of which $10.5 million was contributed in 1997.
Expenses of the issue aggregated $5.1 million and will be amortized over the
term of the Preferred Securities (30 years). In the third quarter the Company
wrote off the remaining unamortized costs of the GGS Senior Credit Facility of
approximately $1.1 million pre-tax or approximately $0.07 per share (basic).
The Preferred Securities have a term of 30 years with semi-annual interest
payments commencing February 15, 1998. The Preferred Securities may be redeemed
in whole or in part after 10 years.
The Company shall not, and shall not permit any subsidiary, to incur
directly or indirectly, any indebtedness unless, on the date of such incurrence
( and after giving effect thereto), the consolidated coverage ratio exceeds 2.5
to 1. The coverage ratio is the aggregate of net earnings, plus interest
expense, income taxes, depreciation and amortization divided by interest expense
for the same period.
The Company plans to fund the distributions on the Preferred Securities
from the excess management and billing fees which are paid by the nonstandard
automobile insurers to their management company. The Company believes such funds
are adequate to pay the distributions on the Preferred Securities for the
foreseeable future. Additionally, the Company has available dividend capacity
from IGF to also meet this funding.
Net cash provided by operating activities in 1997 aggregated $15,945,000
compared to $10,003,000 in 1996. This increase in funds provided was caused by
continued premium growth which results in increased cash flows as loss payments
lag receipt of premiums. Net cash used in investing activities increased from
$92,769,000 in 1996 to $106,164,000 in 1997 reflecting investment of remaining
proceeds from the Preferred Securities Offering and cash flow from operations.
In 1997, financing activities provided cash of $88,400,000 compared to cash
provided of $93,550,000 in 1996, with funds in 1997 primarily from the Preferred
Securities Offering while funds provided in 1996 were primarily from the
financing of the acquisition of Superior.
Net cash provided by operating activities in 1996 was $10,003,000 compared
to $9,654,000 in 1995 for an increase of $349,000. This increase was due to
improved profitability and growth in written premiums. Loss payments in the
nonstandard automobile insurance business tend to lag behind receipt of premiums
thus providing cash for operations. Net cash used in investing activities
increased from $8,835,000 in 1995 to $92,769,000 in 1996. Included in 1996 was a
$66,590,000 use of cash for the Acquisition. The remaining increase in cash used
in investing activities in 1996 related to the growth in investments due
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to increased cash provided by operating activities. The primary items comprising
the $93,550,000 of cash provided by financing activities in 1996 were the
$48,000,000 of proceeds from the GGS Senior Credit Facility, $21,200,000
minority interest investment received as part of the formation of GGS Holdings
and the funding of the Acquisition and $37,969,000 of proceeds from the Initial
Public Offering.
The Company believes cash flows in the nonstandard automobile segment from
premiums, investment income and billing fees are sufficient to meet that
segment's obligations to policyholders, operating expenses and debt service for
the foreseeable future. This is due primarily to the lag time between receipt of
premiums and claims payments. Therefore, the Company does not anticipate
additional borrowings for this segment other than in the event of an
acquisition. The Company also believes cash flows in the crop segment from
premiums and expense reimbursements are sufficient to meet the segment's
obligations for the foreseeable future. Due to the more seasonal nature of the
crop segment's operations, it may be necessary to obtain short term funding at
times during a calendar year by drawing on an existing line of credit. Except
for this short term funding and normal increases therein resulting from an
increase in the business in force, the Company does not anticipate any
significant short or long term additional borrowing needs for this segment.
Accordingly, while there can be no assurance as to the sufficiency of the
Company's cash flow in future periods, the Company believes that its cash flow
will be sufficient to meet all of the Company's operating expenses and debt
service for the foreseeable future and, therefore, does not anticipate
additional borrowings except as may be necessary to finance acquisitions.
While GAAP shareholders' equity was $78,363,000 at December 31, 1997, it
does not reflect the statutory equity upon which the Company conducts its
various insurance operations. Pafco, Superior and IGF individually had statutory
surplus at December 31, 1997 of $19,924,000, $65,146,000 and $42,809,000,
respectively.
Effects of Inflation
Due to the short term that claims are outstanding in the two product lines
the Company underwrites, inflation does not pose a significant risk to the
Company.
Primary Differences Between GAAP and SAP
The financial statements contained herein have been prepared in conformity
with Generally Accepted Accounting Principles ("GAAP") which differ from
statutory accounting practices ("SAP") prescribed or permitted for insurance
companies by regulatory authorities in the following respects: (i) certain
assets are excluded as "Nonadmitted Assets" under statutory accounting; (ii)
costs incurred by the Company relating to the acquisition of new business are
expensed for statutory purposes, (iii) the investment in wholly owned
subsidiaries is consolidated for GAAP rather than valued on the statutory equity
method. The net income or loss and changes in unassigned surplus of the
subsidiaries is reflected in net income for the period rather than recorded
directly to unassigned surplus, (iv) fixed maturity investments are reported at
amortized cost or market value based on their National Association of Insurance
Commissioners ("NAIC") rating; (v) the liability for losses and loss adjustment
expenses and unearned premium reserves are recorded net of their reinsured
amounts for statutory accounting purposes, (vi) deferred income taxes are not
recognized on a statutory basis and (vii) credits for reinsurance are recorded
only to the extent considered realizable.
New Accounting Standards
During 1996, the Company adopted the provisions of SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and SFAS No. 123, "Accounting for Stock-Based Compensation."
The Company has adopted SFAS No. 128, "Earnings Per Share" in 1997. There was no
material impact on the consolidated financial statements from adoption of these
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statements. The Company will adopt SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About A Segments of and Enterprise and
Related Information" in 1998. The Company does not expect the adoption of these
statements to have a material impact on the financial statements. Refer to Note
1 to the Company's "Consolidated Financial Statements."
The NAIC is considering the adoption of a recommended statutory accounting
standard for crop insurers, the impact of which is uncertain since several
methodologies are currently being examined. Although the Indiana Department has
permitted the Company to continue, for its statutory financial statements
through March 31, 1998, its practice of recording its MPCI business as 100%
ceded to the FCIC with net underwriting results recognized in ceding
commissions, the Indiana Department has indicated that in the future it will
require the Company to adopt the MPCI accounting practices recommended by the
NAIC or any similar practice adopted by the Indiana Department. Since such a
standard would be adopted industry wide for crop insurers, the Company would
also be required to conform its future GAAP financial statements to reflect the
new MPCI statutory accounting methodology and to restate all historical GAAP
financial statements consistent with this methodology for comparability. The
Company cannot predict what accounting methodology will eventually be
implemented or when the Company will be required to adopt such methodology. The
Company anticipates that any such new crop accounting methodology will not
affect GAAP net income.
The NAIC currently has a project under way to codify SAP, as existing SAP
does not address all accounting issues and may differ from state to state. Upon
completion, the codification is expected to replace prescribed or permitted SAP
in each state as the new comprehensive statutory basis of accounting for
insurance companies. The final format of the codification is uncertain at this
time, yet implementation could be required as early as January 1, 1999. Due to
the project's uncertainty, the Company has not yet quantified the impact any
such changes would have on the statutory capital and surplus or results of
operations of the Company's insurance subsidiaries. The impact of adopting this
new comprehensive statutory basis of accounting may, however, materially impact
statutory capital and surplus.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. This could
result in recognizing data using "00" as 1900 rather than 2000 which could
result in system failures or miscalculations. This could create a disruption in
business activities.
The Company's nonstandard automobile operations have been in the process
of developing a completely new array of information technology services. During
1998 the Company will be testing and implementing these new systems and expects
to be fully operational with these new systems in 1998. The new systems will be
completely Year 2000 compliant. However, the intention of the new systems was to
improve transaction processing and the Company's expense ratio rather than any
Year 2000 issue. The Company has expended most of the funds necessary for
implementation of these new systems prior to January 1, 1998 and does not expect
expenditures in 1998 to be material. There is no assurance that such systems
will be implemented without a disruption to the Company's operations.
The Company's crop operations have been implementing changes to
incorporate Year 2000 concerns for the past two years and expect completion of
such efforts in 1998. Expenditures for these changes have not been material and
are not expected to be material in the future.
While implementation of these new systems or changes to existing systems
carries risks that modifications will need to be made in order for them to be
completely effective, the Company believes at this time that such modifications
will not require material funds and will not be extensive subsequent to December
31, 1998.
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CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 1997 and 1996
(in thousands, except share data)
CONSOLIDATED BALANCE SHEETS
ASSETS 1997 1996
- ----------------------------------------------------------------------------------------------
ASSETS:
- ----------------------------------------------------------------------------------------------
Investments:
- ----------------------------------------------------------------------------------------------
Available for sale:
- ----------------------------------------------------------------------------------------------
Fixed maturities, at market $ 169,385 $ 127,681
- ----------------------------------------------------------------------------------------------
Equity securities, at market 35,542 27,920
- ----------------------------------------------------------------------------------------------
Short-term investments, at amortized cost,
which approximates market 8,871 9,565
- ----------------------------------------------------------------------------------------------
Real estate, at cost 450 466
- ----------------------------------------------------------------------------------------------
Mortgage loans, at cost 2,220 2,430
- ----------------------------------------------------------------------------------------------
Other 50 75
------- -------
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 216,518 168,137
- ----------------------------------------------------------------------------------------------
Investments in and advances to related parties 839 1,152
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents 11,276 13,095
- ----------------------------------------------------------------------------------------------
Receivables (net of allowance for doubtful accounts of
$1,993 and $1,480 in 1997 and 1996, respectively) 91,730 65,194
- ----------------------------------------------------------------------------------------------
Reinsurance recoverable on paid and unpaid losses, net 93,832 48,294
- ----------------------------------------------------------------------------------------------
Prepaid reinsurance premiums 36,606 14,983
- ----------------------------------------------------------------------------------------------
Federal income taxes recoverable 1,505 319
- ----------------------------------------------------------------------------------------------
Deferred policy acquisition costs 10,740 12,800
- ----------------------------------------------------------------------------------------------
Deferred income taxes 4,722 3,329
- ----------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation 12,051 8,137
- ----------------------------------------------------------------------------------------------
Intangible assets 43,756 4,881
- ----------------------------------------------------------------------------------------------
Other assets 6,300 4,358
------- -------
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 529,875 $ 344,679
======= =======
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------------------------------------------------
Losses and loss adjustment expenses $ 136,772 $ 101,719
- ----------------------------------------------------------------------------------------------
Unearned premiums 114,635 87,285
- ----------------------------------------------------------------------------------------------
Reinsurance payables 35,692 6,508
- ----------------------------------------------------------------------------------------------
Payables to affiliates --- 366
- ---------------------------------------------------------------------------------------------
Line of credit 4,182 ---
- ---------------------------------------------------------------------------------------------
Term debt --- 48,000
- ---------------------------------------------------------------------------------------------
Distributions Payable on Preferred Securities 4,801 ---
- ---------------------------------------------------------------------------------------------
Other 20,430 18,291
------- ------
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES 316,512 262,169
------- -------
- ---------------------------------------------------------------------------------------------
Minority interest:
- ---------------------------------------------------------------------------------------------
Preferred Securities 135,000 ----
- ---------------------------------------------------------------------------------------------
Equity in net assets of subsidiary --- 21,610
------- ------
- ---------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, no par value, 100,000,000 shares
authorized, 10,451,667 and 10,450,000 shares
issued and outstanding in 1997 and 1996, respectively 39,019 38,969
- ---------------------------------------------------------------------------------------------
Additional paid-in capital 5,925 5,905
- ---------------------------------------------------------------------------------------------
Unrealized gain on investments, net of deferred tax
of $1,008 in 1997 and $625 in 1996 1,908 820
- --------------------------------------------------------------------------------------------
Retained earnings 31,511 15,206
------ ------
- --------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 78,363 60,900
------ ------
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 529,875 $ 344,679
======= =======
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
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CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996, and 1995
(in thousands, except per share data)
CONSOLIDATED STATEMENTS OF EARNINGS
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Gross premiums written $ 460,600 $ 305,499 $ 124,634
- -------------------------------------------------------------------------------------------------------------------------------
Less ceded premiums (183,059) (95,907) (71,187)
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
NET PREMIUMS WRITTEN 277,541 209,592 53,447
- -------------------------------------------------------------------------------------------------------------------------------
Change in unearned premiums (5,727) (17,833) (3,806)
------- -------- -------
- -------------------------------------------------------------------------------------------------------------------------------
NET PREMIUMS EARNED 271,814 191,759 49,641
- -------------------------------------------------------------------------------------------------------------------------------
Fee income 20,309 9,286 2,170
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income 11,447 6,733 1,173
- -------------------------------------------------------------------------------------------------------------------------------
Net realized capital gain (loss) 9,444 (1,015) (344)
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 313,014 206,763 52,640
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------------------------------------------------------
Losses and loss adjustment expenses 212,085 137,109 35,971
- -------------------------------------------------------------------------------------------------------------------------------
Policy acquisition and general and administrative expenses 62,631 42,013 7,981
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense 3,158 3,527 1,248
- -------------------------------------------------------------------------------------------------------------------------------
Amortization of intangibles 1,197 411 ---
------- ------- ------
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 279,071 183,060 45,200
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES, MINORITY INTEREST,
AND EXTRAORDINARY ITEM 33,943 23,703 7,440
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
Income taxes:
- -------------------------------------------------------------------------------------------------------------------------------
Current income tax expense 13,105 7,982 2,275
- -------------------------------------------------------------------------------------------------------------------------------
Deferred income tax expense (benefit) (1,124) 64 344
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAXES 11,981 8,046 2,619
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS BEFORE MINORITY INTEREST AND
EXTRAORDINARY ITEM 21,962 15,657 4,821
- -------------------------------------------------------------------------------------------------------------------------------
Minority interest:
- -------------------------------------------------------------------------------------------------------------------------------
Earnings in consolidated subsidiary (1,824) (2,401) ---
- -------------------------------------------------------------------------------------------------------------------------------
Distributions on Preferred Securities, net of tax (3,120) --- ---
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS BEFORE EXTRAORDINARY ITEM 17,018 13,256 4,821
- -------------------------------------------------------------------------------------------------------------------------------
Extraordinary Item, net of tax (713) --- ---
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 16,305 $ 13,256 $ 4,821
======= ======= ======
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - Basic 10,450 7,537 7,000
====== ===== =====
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - Fully Diluted 10,699 7,537 7,000
====== ===== =====
- -------------------------------------------------------------------------------------------------------------------------------
Net earnings per share - Basic $ 1.56 $ 1.76 $ 0.69
======= ======= =======
- -------------------------------------------------------------------------------------------------------------------------------
Net earnings per share - Fully Diluted $ 1.52 $ 1.76 $ 0.69
======= ======= =======
- -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
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CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995
(in thousands)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized
Additional Gain/(Loss) Total
Common Paid-in on Retained Stockholders'
Stock Capital Investments Earnings Equity
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1995 $ 1,000 $ 3,130 $ (504) $ 629 $ 4,255
- --------------------------------------------------------------------------------------------------------------------
Change in unrealized loss on investments,
net of deferred taxes --- --- 459 --- 459
- --------------------------------------------------------------------------------------------------------------------
Net earnings --- --- --- 4,821 4,821
------ ----- ----- ----- -----
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 1,000 3,130 (45) 5,450 9,535
- --------------------------------------------------------------------------------------------------------------------
Sale of subsidiary stock --- 2,775 --- --- 2,775
- --------------------------------------------------------------------------------------------------------------------
Change in unrealized loss on investments,
net of deferred taxes --- --- 865 --- 865
- --------------------------------------------------------------------------------------------------------------------
Issuance of common stock 37,969 --- --- --- 37,969
- --------------------------------------------------------------------------------------------------------------------
Dividend to parent --- --- --- (3,500) (3,500)
- --------------------------------------------------------------------------------------------------------------------
Net earnings --- --- --- 13,256 13,256
------ ------ ----- ------ -------
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 38,969 5,905 820 15,206 60,900
- --------------------------------------------------------------------------------------------------------------------
Adjustment of offering costs 50 --- --- --- 50
- --------------------------------------------------------------------------------------------------------------------
Change in unrealized gain on investments,
net of deferred taxes --- --- 1,088 --- 1,088
- --------------------------------------------------------------------------------------------------------------------
Exercise of stock options --- 20 --- --- 20
- --------------------------------------------------------------------------------------------------------------------
Net earnings --- --- --- 16,305 16,305
------ ------- ----- ------ ------
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 39,019 $ 5,925 $ 1,908 $ 31,511 $ 78,363
======= ====== ====== ======= ======
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
-19-
[small SIG logo]
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $16,305 $13,256 $4,821
- -------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net earnings to net
cash provided from (used in) operations:
- -------------------------------------------------------------------------------------------------------------------------
Minority interest 1,824 2,401 ---
- -------------------------------------------------------------------------------------------------------------------------
Depreciation, amortization and other 5,136 2,194 742
- -------------------------------------------------------------------------------------------------------------------------
Deferred income tax expense (benefit) (1,124) 64 344
- -------------------------------------------------------------------------------------------------------------------------
Net realized capital (gain) loss (9,444) 1,015 344
- -------------------------------------------------------------------------------------------------------------------------
Net changes in operating assets and liabilities
(net of assets acquired):
- -------------------------------------------------------------------------------------------------------------------------
Receivables (27,050) (22,673) 6,462
- -------------------------------------------------------------------------------------------------------------------------
Reinsurance recoverable on losses, net (45,538) 5,842 (41,250)
- -------------------------------------------------------------------------------------------------------------------------
Prepaid reinsurance premiums (21,624) (8,720) 725
- -------------------------------------------------------------------------------------------------------------------------
Federal income taxes recoverable (payable) (1,186) (1,270) 325
- --------------------------------------------------------------------------------------------------------------------------
Deferred policy acquisition costs 2,060 (2,496) (900)
- -------------------------------------------------------------------------------------------------------------------------
Other assets 2,860 (2,923) 1,019
- -------------------------------------------------------------------------------------------------------------------------
Losses and loss adjustment expenses 35,053 (2,125) 30,152
- -------------------------------------------------------------------------------------------------------------------------
Unearned premiums 27,350 24,508 3,081
- -------------------------------------------------------------------------------------------------------------------------
Reinsurance payables 29,184 (1,978) 2,133
- -------------------------------------------------------------------------------------------------------------------------
Other liabilities 2,139 2,908 1,656
------ ------ ------
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM (USED IN) OPERATIONS 15,945 10,003 9,654
------ ------ ------
- -------------------------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
- -------------------------------------------------------------------------------------------------------------------------
Purchase of minority interest (61,000) --- ---
- -------------------------------------------------------------------------------------------------------------------------
Cash paid for Superior --- (66,590) ---
- -------------------------------------------------------------------------------------------------------------------------
Net sales (purchases) of short-term investments 694 8,026 (4,493)
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from sales, calls and maturities of fixed maturities 224,037 56,903 8,603
- -------------------------------------------------------------------------------------------------------------------------
Purchases of fixed maturities (263,560) (73,503) (12,517)
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of equity securities 34,475 19,796 29,599
- -------------------------------------------------------------------------------------------------------------------------
Purchase of equity securities (35,358) (34,157) (28,173)
- -------------------------------------------------------------------------------------------------------------------------
Purchases of mortgage loans --- --- (100)
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from repayment of mortgage loans 210 490 120
- -------------------------------------------------------------------------------------------------------------------------
Purchase of property and equipment (5,662) (3,734) (1,874)
------- ------- ------
- -------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (106,164) (92,769) (8,835)
------- ------- ------
- -------------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of preferred securities 129,947 --- ---
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from initial public offering, net of expenses --- 37,969 ---
- -------------------------------------------------------------------------------------------------------------------------
Proceed from exercise of stock options 20 --- ---
- -------------------------------------------------------------------------------------------------------------------------
Net proceeds (payments) from line of credit 4,182 (5,811) 370
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from/payments made on term debt (48,000) 48,000 ---
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from consolidated subsidiary minority interest owner 2,304 21,200 ---
- -------------------------------------------------------------------------------------------------------------------------
Payment of dividend to parent --- (3,500) ---
- -------------------------------------------------------------------------------------------------------------------------
Loans from and (repayments to) related parties (53) (4,308) 1,080
----- ------- ------
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 88,400 93,550 1,450
------ ------ ------
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,819) 10,784 2,269
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 13,095 2,311 42
------ ----- ------
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $11,276 $13,095 $ 2,311
====== ====== ======
- -------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
-20-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies:
Symons International Group, Inc. (the "Company") is a 67% owned subsidiary of
Goran Capital, Inc. (Goran). The Company is primarily involved in the sale of
personal nonstandard automobile insurance and crop insurance. Nonstandard
automobile represents approximately 70% of the Company's premium volume. The
Company's products are marketed through independent agents and brokers and is
licensed in 38 states, primarily in the Midwest and Southern United States.
The following is a description of the significant accounting policies and
practices employed:
a. Principles of Consolidation: The consolidated financial statements include
the accounts, after intercompany eliminations, of the Company and its
wholly-owned subsidiaries as follows:
GGS Management Holdings, Inc. (GGSH)-a holding company for the nonstandard
automobile operations which includes GGS Management, Inc., Pafco General
Insurance Company, Pafco Premium Finance Company and the Superior entities, as
described below:
GGS Management, Inc. (GGS)-a management company for the nonstandard automobile
operations;
Superior Insurance Company (Superior)-an insurance company domiciled in
Florida;
Superior American Insurance Company (Superior American)-an insurance company
domiciled in Florida;
Superior Guaranty Insurance Company (Superior Guaranty)-an insurance company
domiciled in Florida;
Pafco General Insurance Company (Pafco)-an insurance company domiciled in
Indiana;
IGF Holdings, Inc. (IGFH)-a holding company for the crop operations which
includes IGF and Hail Plus Corp.;
IGF Insurance Company (IGF)-an insurance company domiciled in Indiana.
On January 31, 1996, the Company entered into an agreement with GS Capital
Partners II, L.P. (Goldman Funds) to create a company, GGSH, to be owned 52% by
the Company and 48% by Goldman Funds. GGSH created GGS, a management company for
the nonstandard automobile operations which include Pafco and the Superior
entities. (See Note 2.)
On April 30, 1996, GGSH acquired the Superior entities through a purchase
business combination. The Company's Consolidated Results of Operations for the
year ended December 31, 1996 include the results of operations of the Superior
entities subsequent to April 30, 1996. (See Note 2.)
On August 12, 1997, the Company acquired the 48% minority interest in GGSH from
Goldman Funds through a business purchase combination. (See Note 2.)
b. Basis of Presentation: The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles (GAAP)
which differ from statutory accounting practices (SAP) prescribed or permitted
for insurance companies by regulatory authorities in the following respects:
Certain assets are excluded as "Nonadmitted Assets" under statutory accounting.
Costs incurred by the Company relating to the acquisition of new business are
expensed for statutory purposes.
-21-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
The investment in wholly owned subsidiaries is consolidated for GAAP rather than
valued on the statutory equity method. The net income or loss and changes in
unassigned surplus of the subsidiaries is reflected in net income for the period
rather than recorded directly to unassigned surplus.
Fixed maturity investments are reported at amortized cost or market value based
on their National Association of Insurance Commissioners' (NAIC) rating.
The liability for losses and loss adjustment expenses and unearned premium
reserves are recorded net of their reinsured amounts for statutory accounting
purposes.
Deferred income taxes are not recognized on a statutory basis.
Credits for reinsurance are recorded only to the extent considered realizable.
Under Statutory Accounting Principles ("SAP"), credit for reinsurance ceded are
allowed to the extent the reinsurers meet the statutory requirements of the
Insurance Departments of the States of Indiana and Florida.
Net earnings and capital and surplus for the insurance subsidiaries reported on
the statutory accounting basis is as follows:
1997 1996 1995
- ---------------------------------------------------------------------------
Capital and surplus:
- ---------------------------------------------------------------------------
Superior entities $65,146 $57,121 N/A
- ---------------------------------------------------------------------------
Pafco 19,924 18,112 $11,875
- ---------------------------------------------------------------------------
IGF 42,809 29,412 9,219
- ---------------------------------------------------------------------------
Net earnings (losses):
- ---------------------------------------------------------------------------
Superior entities 379 1,978 N/A
- ---------------------------------------------------------------------------
Pafco (6,080) 5,151 (553)
- ---------------------------------------------------------------------------
IGF 13,404 12,122 6,574
- ---------------------------------------------------------------------------
c. Use of Estimates: The preparation of financial statements requires management
to make estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes known which could impact the amounts
reported and disclosed herein.
d. Premiums: Premiums are recognized as income ratably over the life of the
related policies and are stated net of ceded premiums. Unearned premiums are
computed on the semimonthly pro rata basis.
e. Investments: Investments are presented on the following bases:
Fixed maturities and equity securities are classified as available for sale and
are carried at market value with the unrealized gain or loss as a component of
stockholders' equity, net of deferred tax, and accordingly, has no effect on net
income.
Real estate-at cost, less allowances for depreciation.
Mortgage loans-at outstanding principal balance.
Realized gains and losses on sales of investments are recorded on the trade date
and are recognized in net income on the specific identification basis. Interest
and dividend income are recognized as earned.
-22-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
f. Cash and Cash Equivalents: For purposes of the statement of cash flows, the
Company includes in cash and cash equivalents all cash on hand and demand
deposits with original maturities of three months or less.
g. Deferred Policy Acquisition Costs: Deferred policy acquisition costs are
comprised of agents' commissions, premium taxes and certain other costs which
are related directly to the acquisition of new and renewal business, net of
expense allowances received in connection with reinsurance ceded, which have
been accounted for as a reduction of the related policy acquisition costs and
are deferred and amortized accordingly. These costs are deferred and amortized
over the terms of the policies to which they relate. Acquisition costs that
exceed estimated losses and loss adjustment expenses and maintenance costs are
charged to expense in the period in which those excess costs are determined.
h. Property and Equipment: Property and equipment are recorded at cost.
Depreciation for buildings is based on the straight-line method over 31.5 years
and the declining balance method for other property and equipment over their
estimated useful lives ranging from five to seven years. Asset and accumulated
depreciation accounts are relieved for dispositions, with resulting gains or
losses reflected in net income.
i. Intangible Assets: Intangible assets consists primarily of goodwill, debt
acquisition costs, and organization costs. Goodwill is amortized over a 25-year
period on a straight-line basis based upon management's estimate of the expected
benefit period. Deferred debt acquisition costs are amortized over the term of
the debt. Organization costs are amortized over five years.
j. Losses and Loss Adjustment Expenses: Reserves for losses and loss adjustment
expenses include estimates for reported unpaid losses and loss adjustment
expenses and for estimated losses incurred but not reported. These reserves have
not been discounted. The Company's loss and loss adjustment expense reserves
include an aggregate stop-loss program. The Company retains an independent
actuarial firm to estimate reserves. Reserves are established using individual
case-basis valuations and statistical analysis as claims are reported. Those
estimates are subject to the effects of trends in loss severity and frequency.
While management believes the reserves are adequate, the provisions for losses
and loss adjustment expenses are necessarily based on estimates and are subject
to considerable variability. Changes in the estimated reserves are charged or
credited to operations as additional information on the estimated amount of a
claim becomes known during the course of its settlement. The reserves for losses
and loss adjustment expenses are reported net of the receivables for salvage and
subrogation of approximately $8,099 and $ 4,766 at December 31, 1997 and 1996,
respectively.
k. Preferred Securities: Preferred securities represent Company-obligated
mandatorily redeemable securities of subsidiary holding solely parent debentures
and are reported at their liquidation value under minority interest.
Distributions on these securities are charged against consolidated earnings.
l. Income Taxes: The Company utilizes the liability method of accounting for
deferred income taxes. Under the liability method, companies will establish a
deferred tax liability or asset for the future tax effects of temporary
differences between book and taxable income. Changes in future tax rates will
result in immediate adjustments to deferred taxes. (See Note 11.) Valuation
-23-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
m. Reinsurance: Reinsurance premiums, commissions, expense reimbursements, and
reserves related to reinsured business are accounted for on bases consistent
with those used in accounting for the original policies and the terms of the
reinsurance contracts.
Premiums ceded to other companies have been reported as a reduction of premium
income.
n. Certain Accounting Policies for Crop Insurance Operations: In 1996, IGF
instituted a policy of recognizing (i) 35% of its estimated Multi Peril Crop
Insurance (MPCI) gross premiums written for each of the first and second
quarters, (ii) commission expense at a rate of 16% of MPCI gross premiums
written recognized and (iii) Buy-up Expense Reimbursement at a rate of 29% in
1997 and 31% in 1996 of MPCI gross premiums written recognized along with normal
operating expenses incurred in connection with premium writings. In the third
quarter, if a sufficient volume of policyholder acreage reports have been
received and processed by IGF, IGF's policy is to recognize MPCI gross premiums
written for the first nine months based on a reestimate which takes into account
actual gross premiums processed. If an insufficient volume of policies has been
processed, IGF's policy is to recognize in the third quarter 20% of its full
year estimate of MPCI Gross Premiums Written, unless other circumstances require
a different approach. The remaining amount of Gross Premiums Written is
recognized in the fourth quarter, when all amounts are reconciled. In prior
years, recognition of MPCI gross premiums written was 30%, 30%, 30% and 10%, for
the first, second, third and fourth quarters, respectively. Commencing with its
June 30, 1995 financial statements, IGF also began recognizing MPCI underwriting
gain or loss during the first and second quarters, as well as the third quarter,
reflecting IGF's best estimate of the amount of such gain or loss to be
recognized for the full year, based on, among other things, historical results,
plus a provision for adverse developments.
o. Accounting Changes: In December 1995, SFAS No. 123, "Accounting for
Stock-Based Compensation", was issued. It introduces the use of a fair
value-based method of accounting for stock-based compensation. It encourages,
but does not require, companies to recognize compensation expense for
stock-based compensation to employees based on the new fair value accounting
rules. Companies that choose not to adopt the new rules will continue to apply
the existing accounting rules contained in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. However, SFAS No. 123 requires
companies that choose not to adopt the new fair value accounting rules to
disclose pro forma net income and earnings per share under the new method. The
Company adopted the disclosure provisions of SFAS No. 123 (see Note 22) in 1996.
On January 1, 1996, the Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". SFAS No. 121 requires that long-lived assets to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Adoption of SFAS No. 121 in 1996, did not have a material impact on
the Company's results of operations.
In 1997, the Company adopted the provision of SFAS No. 128, "Earnings per
Share." This statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common stock
or potential common stock. This statement simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, "Earnings per Share",
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures, and requires a reconciliation
of the numerator and denominator of the basic EPS
-24-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
computation to the numerator and denominator of the diluted EPS computation. The
only item impacting the Company's fully diluted EPS is the inclusion of a
portion of the Company's stock options which aggregated 249,000 shares in 1997.
Prior to 1997, there was no dilutive impact on EPS computations. The provisions
of SFAS No. 128 were retroactively applied to all periods presented.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to Opinion 15.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"), both of which are effective for financial
statements issued for periods beginning after December 15, 1997. SFAS 130 will
require companies to disclose comprehensive income in their financial
statements. In addition to items included in net income, comprehensive income
will include items currently charged or credited directly to shareholders'
equity, such as the change in unrealized appreciation (depreciation) of
securities. Implementing SFAS 130 is not expected to have a material impact on
the financial statements.
SFAS 131 establishes new standards for reporting operating segments, products
and services, geographic areas and major customers. Segments are to be defined
consistent with the basis management uses internally to assess performance and
allocate resources. Implementing SFAS 131 is not expected to have a material
impact on the financial statements.
p. Vulnerability from Concentration: At December 31, 1997, the Company did not
have a material concentration of financial instruments in an industry or
geographic location. Also at December 31, 1997, the Company did not have a
concentration of (1) business transactions with a particular customer, lender or
distributor, (2) revenues from a particular product or service, (3) sources of
supply of labor or services used in the business, or (4) a market or geographic
area in which business is conducted that makes it vulnerable to an event that is
at least reasonably possible to occur in the near term and which could cause a
serious impact to the Company's financial condition.
q. Earnings Per Share: The Company's basic earnings per share calculations are
based upon the weighted average number of shares of common stock outstanding
during each period, as restated for the 7,000-for-1 stock split. The weighted
average shares outstanding in 1996 have been increased by 44,000 shares for the
$3.5 million dividend paid to Goran from the proceeds of the Initial Public
Offering, ("IPO") in accordance with generally accepted accounting principles.
The fully diluted earnings per share for 1997 were computed using actual
weighted average shares outstanding of 10,450,000 plus 249,000 assumed shares
from stock option proceeds based upon the treasury stock method.
r. Reclassifications: Amounts from prior periods have been reclassified to
conform to the 1997 presentation. Net earnings and stockholders' equity have not
been affected by these reclassifications.
-25-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
2. Corporate Reorganization and Acquisitions:
In April 1996, Pafco contributed all of the outstanding shares of capital stock
of IGF to IGF Holdings, a wholly owned and newly formed subsidiary of Pafco, and
the Board of Directors of IGF Holdings declared an $11,000 distribution to Pafco
in the form of cash of $7,500 and a note payable of $3,500 (Pafco Note). IGFH
borrowed the $7,500 portion of the distribution from a bank (IGFH Note). The
notes were paid in full from the proceeds of the Offering. Immediately following
the distribution, Pafco distributed all of the outstanding common stock of IGF
Holdings to the Company, collectively referred to as the "IGF Reorganization".
Although the Company believes the plan of reorganization or spin off did not
result in gain or loss, no assurance can be given that the Internal Revenue
Service will not challenge the transaction.
On January 31, 1996, the Company entered into an agreement (Agreement) with GS
Capital Partners II, L.P. to create GGSH, to be owned 52% by the Company and 48%
by the Goldman Funds. In accordance with the Agreement, on April 30, 1996, the
Company contributed certain fixed assets and Pafco with a combined book value,
determined in accordance with generally accepted accounting principles, of
$17,186, to GGSH. Goldman Funds contributed $21,200 to GGSH, in accordance with
the Agreement. In return for the cash contribution of $21,200, Goldman Funds
received a minority interest share in GGSH at the date of contribution of
$18,425, resulting in a $2,775 increase to additional paid-in capital. At
December 31, 1996, Goldman Funds' minority interest share consisted of the
following:
Contribution, April 30, 19 $ 18,425
GGSH earnings 2,401
Unrealized gains, net of deferred tax of $599 784
------
$ 21,610
======
In connection with the above transactions, GGSH acquired (the "Acquisition") all
of the outstanding shares of common stock of Superior Insurance Company and its
wholly owned subsidiaries, domiciled in Florida, (collectively referred to as
"Superior") for cash of $66,590. In conjunction with the Acquisition, the
Company's funding was through a senior bank facility of $48,000 and a cash
contribution from Goldman Funds of $21,200.
The acquisition of Superior was accounted for as a purchase and recorded as
follows:
Assets acquired $ 163,605
Liabilities assumed 100,566
-------
Net assets required 63,039
Purchase price 66,590
-------
Excess purchase price 3,551
Less amounts allocated to deferred income
taxes on unrealized gains on investments 1,334
-------
Goodwill $ 2,217
=======
The Company's results from operations for the year ended December 31, 1996
include the results of Superior subsequent to April 30, 1996.
On August 12, 1997, the Company purchased the remaining minority interest in
GGSH for $61 million in cash. The excess of the acquisition price over the
minority interest liability aggregated approximately $36,045,000 and was
assigned to goodwill as the fair market value of acquired assets approximately
their carrying value.
-26-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
3. Public Offerings:
On November 5, 1996, the Company sold 3,000,000 shares at $12.50 per share in an
initial public offering of common stock. An additional 450,000 shares were sold
in December 1996 representing the exercise of the over allotment option. The
Company generated net proceeds, after underwriter's discount and expenses, of
$37,900 from the IPO. The proceeds were used to repay the IGFH Note and Pafco
Note totaling $11,000, repay indebtedness to Goran and Granite Re of
approximately $7,500, pay Goran a dividend of $3,500 and contribute capital to
IGF of $9,000. The remainder will be used for general corporate purposes,
including acquisitions. After completion of the IPO, Goran owns 67% of the total
common stock outstanding.
Assuming that these transactions, described in Notes 2 and 3, took place
(including the IPO) at January 1, 1995 or at January 1, 1996, the pro forma
effect of these transactions on the Company's Consolidated Statements of
Earnings is as follows:
1996 1995
(unaudited)
Revenues $ 250,848 $159,899
======= =======
Net Income $ 15,238 $ 6,701
====== =====
Net Income per common share $ 1.42 $ 0.65
==== ====
Assuming that these transactions took place (including the IPO) at January 1,
1995 or January 1, 1996 and that shares outstanding only included shares issued
in connection with the IPO whose proceeds were used to repay indebtedness, the
pro forma effect of these transactions on the Company's net income per common
share is as follows:
1996 1995
(unaudited)
Net Income per common share $ 1.86 $ 0.81
==== ====
Outstanding shares used in the above calculation include the 7,000,000 shares
outstanding before the Offering plus 1,200,000 shares issued in connection with
the IPO whose proceeds were used to pay external indebtedness. The latter
calculation was determined by dividing the aggregate amount of the repayment of
the $7.5 million IGFH Note and the $7.5 million repayment of parent indebtedness
by the IPO price of $12.50 per share.
On August 12, 1997, the Company issued $135 million in Trust Originated
Preferred Securities ("Preferred Securities"). These Preferred Securities were
offered through a wholly-owned trust subsidiary of the Company and are backed by
Senior Subordinated Notes to the Trust from the Company. These Preferred
Securities were offered under Rule 144A of the SEC ("Preferred Securities
Offering") and, pursuant to the Registration Rights Agreement executed at
closing, the Company filed a Form S-4 Registration Statement with the SEC on
September 16, 1997 to effect the Exchange Offer. The S-4 Registration Statement
was declared effective on September 30, 1997 and the Exchange Offer successfully
closed on October 31, 1997. The proceeds of the Preferred Securities Offering
were used to repurchase the remaining minority interest in GGSH for $61 million,
repay the balance of the term debt of $44.9 million and the Company expects to
contribute the balance, after expenses, of approximately $24 million to the
nonstandard automobile insurers of which $10.5 million was contributed in 1997.
Expenses of the issue aggregated $5.1 million and will be amortized over the
term of the Preferred Securities (30 years). In the third quarter the Company
wrote off the remaining unamortized costs of the term debt of approximately $1.1
million pre-tax or approximately $0.07 per share which was recorded as an
extraordinary item.
The Preferred Securities have a term of 30 years with semi-annual interest
payments commencing February 15, 1998.
-27-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
The Preferred Securities may be redeemed in whole or in part after 10 years.
The Company shall not, and shall not permit any subsidiary, to incur directly or
indirectly, any indebtedness unless, on the date of such incurrence (and after
giving effect thereto), the Consolidated Coverage Ratio exceeds 2.5 to 1. The
Coverage Ratio is the aggregate of net earnings, plus interest expense, income
taxes, depreciation, and amortization divided by interest expense for the same
period.
Assuming the Preferred Securities Offering took place at January 1, 1997, the
proforma effect of this offering on the Company's consolidated statement of
earnings from continuing operations for the year ended December 31, 1997 is as
follows:
Unaudited
(In thousands)
Revenues $313,014
Net earnings from continuing operations $15,314
Net earnings from continuing operations per common share
(fully diluted) $1.43
Proforma results for the Preferred Securities Offerings for 1996 and 1995 would
not be meaningful due to the Acquisition and IPO in 1996.
The pro forma results are not necessarily indicative of what actually would have
occurred if these transactions had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results.
-28-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
4. Investments:
Investments are summarized as follows:
Cost or
Amortized Unrealized Estimated
December 31, 1997 Cost Gain Loss Market Value
- -----------------------------------------------------------------------------------------------------------
Fixed Maturities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 83,661 $ 910 $ (48) $ 84,523
- -----------------------------------------------------------------------------------------------------------
Foreign governments 537 11 --- 548
- -----------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions 1,000 --- --- 1,000
- -----------------------------------------------------------------------------------------------------------
Corporate securities 82,628 746 (60) 83,314
------ ----- ---- ------
- -----------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 167,826 1,667 (108) 169,385
------- ----- ---- -------
- -----------------------------------------------------------------------------------------------------------
Equity securities 34,220 4,427 (3,105) 35,542
- -----------------------------------------------------------------------------------------------------------
Short-term investments 8,871 -- --- 8,871
- -----------------------------------------------------------------------------------------------------------
Real estate 450 -- --- 450
- -----------------------------------------------------------------------------------------------------------
Mortgage Loans 2,220 -- --- 2,220
- -----------------------------------------------------------------------------------------------------------
Other loans 50 -- --- 50
------- ----- ----- -------
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 213,637 $6,094 $ (3,213) $ 216,518
======= ====== ====== =======
- -----------------------------------------------------------------------------------------------------------
Cost or
Amortized Unrealized Estimated
December 31, 1996 Cost Gain Loss Market Value
- -----------------------------------------------------------------------------------------------------------
Fixed Maturities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 55,034 $ 343 $ (233) $ 55,144
- -----------------------------------------------------------------------------------------------------------
Foreign governments 1,515 --- (30) 1,485
- -----------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions 2,945 11 (4) 2,952
- -----------------------------------------------------------------------------------------------------------
Corporate securities 67,545 977 (422) 68,100
------- ------ ----- ------
- -----------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 127,039 1,331 (689) 127,681
------- ----- ----- -------
- -----------------------------------------------------------------------------------------------------------
Equity securities 25,734 2,884 (698) 27,920
- -----------------------------------------------------------------------------------------------------------
Short-term investments 9,565 --- --- 9,565
- -----------------------------------------------------------------------------------------------------------
Real estate 466 --- --- 466
- -----------------------------------------------------------------------------------------------------------
Mortgage Loans 2,430 --- --- 2,430
- ----------------------------------------------------------------------------------------------------------
Other loans 75 --- --- 75
----- ----- ----- ------
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 165,309 $4,215 $ (1,387) $ 168,137
======= ====== ====== =======
- ------------------------------------------------------------------------------------------------------------
-29-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
At December 31, 1997, 90.2% of the Company's fixed maturities were considered
investment grade by The Standard & Poors Corporation or Moody's Investor
Services, Inc. Securities with quality ratings Baa and above are considered
investment grade securities. In addition, the Company's investments in fixed
maturities did not contain any significant geographic or industry concentration
of credit risk.
The amortized cost and estimated market value of fixed maturities at December
31, 1997, by contractual maturity, are shown in the table which follows.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without penalty:
Estimated
Amortized Market
Cost Value
- ------------------------------------------------------------------------------------------
Maturity:
- ------------------------------------------------------------------------------------------
Due in one year or less $1,882 $1,880
- ------------------------------------------------------------------------------------------
Due after one year through five years 57,350 57,782
- ------------------------------------------------------------------------------------------
Due after five years through ten years 30,102 30,793
- ------------------------------------------------------------------------------------------
Due after ten years 8,139 8,390
------ ------
- ------------------------------------------------------------------------------------------
97,473 98,845
- ------------------------------------------------------------------------------------------
Mortgage-backed securities 70,353 70,540
------- -------
- ------------------------------------------------------------------------------------------
TOTAL $167,826 $169,385
======= =======
- ------------------------------------------------------------------------------------------
Gains and losses realized on sales of investments are as follows:
1997 1996 1995
- -----------------------------------------------------------------------------------------
Proceeds from sales $254,470 $76,699 $38,202
- -----------------------------------------------------------------------------------------
Gross gains realized 10,639 1,194 653
- -----------------------------------------------------------------------------------------
Gross losses realized 1,195 2,209 997
- -----------------------------------------------------------------------------------------
Net investment income for the years ended December 31 are as follows:
1997 1996 1995
- ----------------------------------------------------------------------------------------
Fixed maturities $10,061 $5,714 $534
- ----------------------------------------------------------------------------------------
Equity securities 305 756 256
- ----------------------------------------------------------------------------------------
Cash and short-term investments 1,385 281 194
- ----------------------------------------------------------------------------------------
Mortgage loans 182 207 231
- ----------------------------------------------------------------------------------------
Other (39) 76 322
----- ----- ----
- ----------------------------------------------------------------------------------------
Total investment income 11,894 7,034 1,537
- ----------------------------------------------------------------------------------------
Investment expenses (447) (301) (364)
------ ----- -----
- ----------------------------------------------------------------------------------------
Net investment income $11,447 $6,733 $1,173
====== ===== =====
- ----------------------------------------------------------------------------------------
Investments with a market value of $24,067 and $23,419 (amortized cost of
$23,913 and $22,749) as of December 31, 1997 and 1996, respectively, were on
deposit in the United States and Canada. The deposits are required by various
insurance departments and others to support licensing requirements and certain
reinsurance contracts, respectively.
-30-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
5. Deferred Policy Acquisition Costs:
Policy acquisition costs are capitalized and amortized over the life of the
policies. Policy acquisition costs are those costs directly related to the
issuance of insurance policies including commissions, premium taxes, and
underwriting expenses net of reinsurance commission income on such policies.
Policy acquisition costs both acquired and deferred, and the related
amortization charged to income were as follows:
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Balance, beginning of year $12,800 $2,379 $1,479
- ----------------------------------------------------------------------------------------------------------------
Deferred policy acquisition costs purchased in
the Superior acquisition --- 7,925 ---
- ----------------------------------------------------------------------------------------------------------------
Costs deferred during year 57,155 27,657 8,050
- ----------------------------------------------------------------------------------------------------------------
Amortization during year (59,215) (25,161) (7,150)
------ ------ -----
- ----------------------------------------------------------------------------------------------------------------
Balance, end of year $10,740 $12,800 $2,379
======= ======= ======
- ----------------------------------------------------------------------------------------------------------------
6. Property and Equipment:
Property and equipment at December 31 are summarized as follows:
1997 Accumulated 1997 1996
Cost Depreciation Net Net
- ---------------------------------------------------------------------------------------------------------------
Land $ 226 $ -- $ 226 $ 226
- ---------------------------------------------------------------------------------------------------------------
Buildings 5,421 1,323 4,098 3,156
- ---------------------------------------------------------------------------------------------------------------
Office furniture and equipment 3,449 1,636 1,813 1,024
- ---------------------------------------------------------------------------------------------------------------
Automobiles 20 13 7 13
- ---------------------------------------------------------------------------------------------------------------
Computer equipment 8,344 2,437 5,907 3,718
----- ----- ----- -----
- --------------------------------------------------------------------------------------------------------------
Total $ 17,460 $ 5,409 $ 12,051 $ 8,137
====== ===== ====== =====
- --------------------------------------------------------------------------------------------------------------
Accumulated depreciation at December 31, 1996 was $4,009. Depreciation expense
related to property and equipment for the years ended December 31, 1997, 1996
and 1995 were $1,764, $1,783, and $637, respectively.
7. Intangible Assets:
Intangible assets at December 31 are as follows:
1997 Accumulated 1997 1996
Cost Amortization Net Net
- -------------------------------------------------------------------------------------------------------------
Goodwill $ 38,168 $ 654 $ 37,514 $ 2,122
- -------------------------------------------------------------------------------------------------------------
Deferred debt costs 5,123 69 5,054 1,232
- -------------------------------------------------------------------------------------------------------------
Organization costs 1,527 339 1,188 1,527
----- --- ----- -----
- -------------------------------------------------------------------------------------------------------------
$ 44,818 $ 1,062 $ 43,756 $ 4,881
====== ===== ====== =====
- -------------------------------------------------------------------------------------------------------------
Accumulated amortization at December 31, 1996 was $411. Amortization expense
related to intangible assets for the years ended December 31, 1997, 1996, and
1995 was $1,197, $411 and $0, respectively.
8. Line of Credit:
At December 31, 1997, IGF maintained a revolving bank line of credit in the
amount of $7,000. At December 31, 1997 and 1996, the outstanding balance
including accrued interest of $100, was $4,182 and $0, respectively. Interest on
this line of credit was at the New York prime rate (8.5% at December 31, 1997)
plus 0.25% adjusted daily. Subsequent to December 31, 1997 this rate was
adjusted to prime minus .75%. This line is collateralized by the crop-related
uncollected premiums, reinsurance recoverable on paid losses, Federal Crop
-31-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
Insurance Corporation (FCIC) annual settlement, and a first lien on the real
estate owned by IGF. The line requires IGF to maintain its primary banking
relationship with the issuing bank, limits capital purchases and requires the
maintenance of certain financial ratios. At December 31, 1997, IGF was in
compliance with all covenants associated with the line or had received proper
waivers.
The weighted average interest rate on the line of credit was 8.75%, 8.6%, and
9.7% during 1997, 1996, and 1995, respectively.
9. Term Debt:
The term debt, with an outstanding principal balance of $44,872 was repaid in
full on August 12, 1997. The interest on the term debt was paid fully at LIBOR
plus 2.75%.
10. Unpaid Losses and Loss Adjustment Expenses:
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Balance at January 1 $101,719 $59,421 $29,269
- --------------------------------------------------------------------------------------------------------
Less reinsurance recoverables 29,459 37,798 12,542
------ ------ ------
- --------------------------------------------------------------------------------------------------------
NET BALANCE AT JANUARY 1 72,260 21,623 16,727
------ ------ ------
- --------------------------------------------------------------------------------------------------------
Reserves acquired in connection with the Superior Acquisition -- 44,423 --
- --------------------------------------------------------------------------------------------------------
Incurred related to:
- --------------------------------------------------------------------------------------------------------
Current year 201,118 138,618 35,184
- --------------------------------------------------------------------------------------------------------
Prior years 10,967 (1,509) 787
------ ------- --------
- --------------------------------------------------------------------------------------------------------
TOTAL INCURRED 212,085 137,109 35,971
------- ------- ------
- --------------------------------------------------------------------------------------------------------
Paid related to:
- --------------------------------------------------------------------------------------------------------
Current year 138,111 102,713 21,057
- --------------------------------------------------------------------------------------------------------
Prior years 60,566 28,182 10,018
------ ------ ------
- --------------------------------------------------------------------------------------------------------
TOTAL PAID 198,677 130,895 31,075
------- ------- ------
- --------------------------------------------------------------------------------------------------------
NET BALANCE AT DECEMBER 31 85,668 72,260 21,623
- --------------------------------------------------------------------------------------------------------
Plus reinsurance recoverables 51,104 29,459 37,798
------ ------ ------
- --------------------------------------------------------------------------------------------------------
Balance at December 31 $136,772 $101,719 $59,421
======= ======= ======
- --------------------------------------------------------------------------------------------------------
Reserve estimates are regularly adjusted in subsequent reporting periods,
consistent with sound insurance reserving practices, as new facts and
circumstances emerge which indicates a modification of the prior estimate is
necessary. The adjustment, referred to as "reserve development," is inevitable
given the complexities of the reserving process and is recorded in the
statements of earnings in the period the need for the adjustments becomes
apparent. The foregoing reconciliation indicates that deficient (redundant)
reserve developments of $10,967, $(1,509) and $787 in the December 31, 1996,
1995 and 1994 loss and loss adjustment expense reserves, respectively, emerged
in the following year. The higher than anticipated 1996 deficient reserve
development occurred primarily due to volatility in the historical trends for
the nonstandard automobile business as a result of significant growth during
-32-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
1996. Reserve developments also result from lower or higher than anticipated
losses resulting from a change in settlement costs relating to those estimates.
The anticipated effect of inflation is implicitly considered when estimating
liabilities for losses and LAE. While anticipated price increases due to
inflation are considered in estimating the ultimate claim costs, the increase in
average severities of claims is caused by a number of factors that vary with the
individual type of policy written. Future average severities are projected based
on historical trends adjusted for implemented changes in underwriting standards,
policy provisions, and general economic trends. Those anticipated trends are
monitored based on actual development and are modified if necessary.
Liabilities for loss and loss adjustment expenses have been established when
sufficient information has been developed to indicate the involvement of a
specific insurance policy. In addition, a liability has been established to
cover additional exposure on both known and unasserted claims. The effects of
changes in settlement costs, inflation, growth and other factors have all been
considered in establishing the current year reserve for unpaid losses and loss
adjustment expenses.
11. Income Taxes:
The Company files a consolidated federal income tax return with its wholly owned
subsidiaries. GGSH filed a short-period consolidated tax return with its wholly
owned subsidiaries through July 31, 1997. In 1998, the Company shall file a
consolidated federal income tax return which includes GGSH. Intercompany tax
sharing agreements between the Company and its wholly owned subsidiaries provide
that income taxes will be allocated based upon separate return calculations in
accordance with the Internal Revenue Code of 1986, as amended. Intercompany tax
payments are remitted at such times as estimated taxes would be required to be
made to the Internal Revenue Service.
The difference between federal tax at the statutory rate of 35% in 1997 and 1996
and 34% in 1995 and actual income tax recorded was primarily the effects of
nondeductible goodwill and the dividends received deduction.
The net deferred tax asset at December 31, 1997 and 1996 is comprised of the
following:
1997 1996
- --------------------------------------------------------------------------
Deferred tax assets:
- --------------------------------------------------------------------------
Unpaid losses and loss adjustment expenses $2,974 $2,705
- --------------------------------------------------------------------------
Unearned premiums and prepaid reinsurance 5,462 5,061
- --------------------------------------------------------------------------
Allowance for doubtful accounts 698 518
- --------------------------------------------------------------------------
Net operating loss carryforwards 233 328
- --------------------------------------------------------------------------
Other 242 685
--- -----
- --------------------------------------------------------------------------
DEFERRED TAX ASSET 9,609 9,297
----- -----
- --------------------------------------------------------------------------
Deferred tax liabilities:
- --------------------------------------------------------------------------
Deferred policy acquisition costs (3,759) (4,480)
- --------------------------------------------------------------------------
Unrealized gains on investments (1,008) (1,224)
- --------------------------------------------------------------------------
Other (120) (264)
----- -----
- --------------------------------------------------------------------------
DEFERRED TAX LIABILITY 4,887 (5,968)
----- -----
- --------------------------------------------------------------------------
NET DEFERRED TAX ASSET $4,722 $3,329
===== =====
- --------------------------------------------------------------------------
-33-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
The Company is required to establish a "valuation allowance" for any portion of
its deferred tax assets which is unlikely to be realized. No valuation allowance
has been established as of December 31, 1997 and 1996 since management believes
it is more likely than not that the Company will realize the benefit of its
deferred tax assets through utilization of such amounts under the carryback
rules and through future taxable income.
As of December 31, 1997, the Company has unused net operating loss carryovers
available as follows:
Amount
- -------------------------------------------------------------------------------
Years ending not later than December 31:
- -------------------------------------------------------------------------------
2000 $541
- -------------------------------------------------------------------------------
2002 126
---
- -------------------------------------------------------------------------------
TOTAL $667
- -------------------------------------------------------------------------------
Federal income tax filings attributed to the Company have been examined by the
Internal Revenue Service through 1993.
12. Leases:
The Company has certain commitments under long-term operating leases for a
branch office and sales offices for Superior Insurance Company. Rental expense
under these commitments was $1,176 for 1997 and $751 in 1996. Future minimum
lease payments required under these noncancellable operating leases are as
follows:
1998 $ 502
- --------------------------------------------------------------------------------
1999 417
- --------------------------------------------------------------------------------
2000 274
- --------------------------------------------------------------------------------
2001 214
- --------------------------------------------------------------------------------
2002 and thereafter 136
----
- --------------------------------------------------------------------------------
TOTAL $1,543
- --------------------------------------------------------------------------------
13. Reinsurance:
The Company limits the maximum net loss that can arise from a large risk, or
risks in concentrated areas of exposure, by reinsuring (ceding) certain levels
of risks with other insurers or reinsurers, either on an automatic basis under
general reinsurance contracts known as "treaties" or by negotiation on
substantial individual risks. Such reinsurance includes quota share, excess of
loss, stop-loss and other forms of reinsurance on essentially all property and
casualty lines of insurance. In addition, the Company assumes reinsurance on
certain risks. The Company remains contingently liable with respect to
reinsurance, which would become an ultimate liability of the Company in the
event that such reinsuring companies might be unable, at some later date, to
meet their obligations under the reinsurance agreements.
Approximately 34% of amounts recoverable from reinsurers are with the FCIC, a
branch of the federal government. Another 30% of recoverable amounts are with
Granite Re Insurance Company Ltd. ("Granite Re"), an affiliated foreign
corporation, which has not applied for an A.M. Best rating. An additional 3.8%
of uncollateralized recoverable amounts are with companies which maintain an
-34-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
A.M. Best rating of at least A+. Company management believes amounts recoverable
from reinsurers are collectible.
On April 29, 1996, Pafco and IGF entered into a 100% quota share reinsurance
agreement, whereby all of IGF's nonstandard automobile business from 1996 and
forward was ceded to Pafco effective January 1, 1996.
On April 29, 1996, Pafco retroactively ceded all of its commercial business
relating to 1995 and previous years to Granite Re, with an effective date of
January 1, 1996. Approximately $3,519 and $2,380 of loss and loss adjustment
expense reserves and unearned premium reserves, respectively, were ceded and no
gain or loss recognized. Effective January 1, 1998, Granite Re ceded the 1995
and prior commercial business back to Pafco. Approximately $1,803 in loss and
loss adjustment expense reserves were ceded back to Pafco and no gain or loss
was recognized.
On April 29, 1996, Pafco also entered into a 100% quota share reinsurance
agreement with Granite Re, whereby all of Pafco's commercial business from 1996
and thereafter was ceded effective January 1, 1996.
Reinsurance activity for 1997, 1996, and 1995, which includes reinsurance with
related parties, is summarized as follows:
1997 Direct Assumed Ceded Net
- -------------------------------------------------------------------------------------------------
Premiums Written $430,002 $30,598 $(183,059) $277,541
- -------------------------------------------------------------------------------------------------
Premiums Earned 400,081 33,209 (161,476) 271,814
- -------------------------------------------------------------------------------------------------
Incurred losses and loss adjustment expenses 290,712 35,034 (133,661) 212,085
- -------------------------------------------------------------------------------------------------
Commission expenses (income) 59,951 7,461 (77,898) (10,486)
- -------------------------------------------------------------------------------------------------
1996
- -------------------------------------------------------------------------------------------------
Premiums Written $298,596 $6,903 $(95,907) $209,592
- -------------------------------------------------------------------------------------------------
Premiums Earned 279,061 6,903 (94,205) 191,759
- -------------------------------------------------------------------------------------------------
Incurred losses and loss adjustment expenses 223,879 4,260 (91,030) 137,109
- -------------------------------------------------------------------------------------------------
Commission expenses (income) 44,879 3,663 (46,716) 1,826
- -------------------------------------------------------------------------------------------------
1995
- -------------------------------------------------------------------------------------------------
Premiums Written $123,381 $1,253 $(71,187) $53,447
- -------------------------------------------------------------------------------------------------
Premiums Earned 116,860 1,256 (68,475) 49,641
- -------------------------------------------------------------------------------------------------
Incurred losses and loss adjustment expenses 125,382 2,839 (92,250) 35,971
- -------------------------------------------------------------------------------------------------
Commission expenses (income) 17,177 174 (27,092) (9,741)
- -------------------------------------------------------------------------------------------------
Amounts recoverable from reinsurers relating to unpaid losses and loss
adjustment expenses were $51,104, $29,459, and $37,798, as of December 31, 1997,
1996, and 1995, respectively. These amounts are reported gross of the related
reserves for unpaid losses and loss adjustment expenses in the accompanying
Consolidated Balance Sheets.
14. Related Parties:
The Company and its subsidiaries have entered into transactions with various
related parties including transactions with Goran, and its affiliates, Symons
International Group, Ltd. (SIG Ltd.), Goran's parent, Granite Insurance Company
(Granite), and Granite Re, Goran's subsidiaries.
-35-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
The following balances were outstanding at December 31:
1997 1996
- ------------------------------------------------------------------------------------
Investments in and advances to related parties:
- ------------------------------------------------------------------------------------
Nonredeemable, nonvoting preferred stock of Granite $ 702 $ 702
- ------------------------------------------------------------------------------------
Unsecured mortgage loan from director and officer -- 278
- ------------------------------------------------------------------------------------
Due from directors and officers 110 172
- ------------------------------------------------------------------------------------
Other receivables from related parties 27 ---
- ------------------------------------------------------------------------------------
$ 839 $ 1,152
==== =====
- ------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------
Payable to affiliates:
- ------------------------------------------------------------------------------------
Other payables to Goran $ --- $ 350
- ------------------------------------------------------------------------------------
Other payables to related parties --- 16
- ------------------------------------------------------------------------------------
$ --- $ 366
=== ====
- ------------------------------------------------------------------------------------
The following transactions occurred with related parties in the years ended
December 31:
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
Management fees charged by Goran $ --- $ 139 $ 414
- ------------------------------------------------------------------------------------------------------------
Reinsurance under various treaties, net:
- ------------------------------------------------------------------------------------------------------------
Ceded premiums earned 13,537 5,463 5,235
- ------------------------------------------------------------------------------------------------------------
Ceded losses and loss adjustment expenses incurred 11,876 5,168 2,612
- ------------------------------------------------------------------------------------------------------------
Ceded commissions 3,523 2,620 1,142
- ----------------------------------------------------------------------------------------------------------
Consulting fees charged by various related parties 26 180 26
- ------------------------------------------------------------------------------------------------------------
Interest charged by Goran --- 196 208
- ------------------------------------------------------------------------------------------------------------
Interest charged by Granite Re --- 385 346
- ------------------------------------------------------------------------------------------------------------
In February 1998, GGS Management loaned Granite Re $3,199 payable in February
2002 with interest due semiannually at 6.8% to be used as collateral for
reinsurance transactions.
15. Stockholders' Equity:
On July 29, 1996, the Board of Directors approved an increase in the authorized
common stock of the Company from 1,000 shares to 100,000,000 shares. The common
stock remains no par value. On July 29, 1996, the Board approved a 7,000-for-1
stock split of the Company's issued and outstanding shares. All share and per
share amounts have been restated to retroactively reflect the stock split. On
July 29, 1996, the Board of Directors authorized the issuance of 50,000,000
shares of preferred stock. No shares of preferred stock have been issued.
16. Effects of Statutory Accounting Practices and Dividend Restrictions:
The minimum capital and surplus required by Indiana statute for Pafco and IGF is
$1,250. Statutory requirements place limitations on the amount of funds which
can be remitted to the Company from Pafco and IGF. The Indiana statute allows
-36-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
10% of surplus as regard to policyholders or 100% of net income, whichever is
greater, to be paid as dividends only from earned surplus.
The minimum capital and surplus required by Florida statute for Superior is
$1,950 and $2,100 at December 31, 1997 and 1996, respectively. In the consent
order approving the Acquisition, the Florida Department has prohibited Superior
from paying any dividends for four years without the prior written approval of
the Florida Department.
Subsequent to Board of Directors and regulatory approval, IGF declared and paid
in April 1996 and December 1995 extraordinary dividends to Pafco in the amounts
of $11 million and $2 million on the 2,494,000 shares of convertible preferred
stock owned by Pafco. In December 1995, upon Board of Directors of Pafco and
regulatory approval, Pafco declared and paid to the Company a $1.5 million
extraordinary dividend on the common stock owned by the Company.
17. Regulatory Matters:
Pafco and IGF, domiciled in Indiana, prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Indiana Department of Insurance (IDOI). The Superior entities, domiciled in
Florida, prepare their statutory financial statements in accordance with
accounting practices prescribed or permitted by the Florida Department of
Insurance (FDOI). Prescribed statutory accounting practices include a variety of
publications of the NAIC, as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
IGF received written approval through March 31, 1998 from the IDOI to reflect
its business transacted with the FCIC as a 100% cession with any net
underwriting results recognized in ceding commissions for statutory accounting
purposes, which differs from prescribed statutory accounting practices. As of
December 31, 1997, that permitted transaction had no effect on statutory surplus
or net income. The underwriting profit results of the FCIC business, net of
reinsurance of $26,589, $12,277 and $9,653, are netted with policy acquisition
and general and administrative expenses for the years ended December 31, 1997,
1996, and 1995, respectively, in the accompanying Consolidated Statements of
Earnings.
The NAIC is considering the adoption of a recommended statutory accounting
standard for crop insurers, the impact of which is uncertain since several
methodologies are currently being examined. Although the Indiana Department has
permitted the Company to continue for its statutory financial statements through
December 31, 1997 its practice of recording its MPCI business as 100% ceded to
the FCIC with net underwriting results recognized in ceding commissions, the
Indiana Department has indicated that in the future it will require the Company
to adopt the MPCI accounting practices recommended by the NAIC or any similar
practice adopted by the Indiana Department. Since such a standard would be
adopted industry-wide for crop insurers, the Company would also be required to
conform its future GAAP financial statements to reflect the new MPCI statutory
accounting methodology and to restate all historical GAAP financial statements
consistently with this methodology for comparability. The Company cannot predict
what accounting methodology will eventually be implemented or when the Company
will be required to adopt such methodology. The Company anticipates that any
such new crop accounting methodology will not affect GAAP net earnings.
As of December 31, 1997, IGF, Pafco and the Superior entities had risk-based
capital ratios that were in excess of the minimum requirements.
-37-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
The NAIC currently has a project under way to codify SAP, as existing SAP does
not address all accounting issues and may differ from state to state. Upon
completion, the Codification is expected to replace prescribed or permitted SAP
in each state as the new comprehensive statutory basis of accounting for
insurance companies. The final format of the Codification is uncertain at this
time, yet implementation could be required as early as January 1, 1999. Due to
the project's uncertainty, the Company has not yet quantified the impact any
such changes would have on the statutory capital and surplus or results of
operations of the Company's insurance subsidiaries. The impact of adopting this
new comprehensive statutory basis of accounting is, however, expected to
materially impact statutory capital and surplus.
18. Commitments and Contingencies:
The Company, and its subsidiaries, are named as defendants in various lawsuits
relating to their business. Legal actions arise from claims made under insurance
policies issued by the subsidiaries. These actions were considered by the
Company in establishing its loss reserves. The Company believes that the
ultimate disposition of these lawsuits will not materially affect the Company's
operations or financial position.
On October 27, 1997, IGF reached an agreement with the FCIC to settle a lawsuit
started March 23, 1995, with both parties dismissing all claims against one
another which were subject to the litigation. The FCIC has agreed to pay IGF a
lump sum payment of $60,000.
The Company bought an office building in Des Moines, Iowa, as its crop insurance
division home office. The purchase price was $2.6 million. The sale of the old
building is expected to close on April 1, 1998 for $1,350,000.
19. Supplemental Cash Flow Information:
Cash paid for interest and income taxes are summarized as follows:
1997 1996 1995
- ------------------------------------------------------------------------------
Cash paid for interest $3,467 $5,178 $553
- ------------------------------------------------------------------------------
Cash paid for federal income taxes, net of refunds 11,670 9,825 1,953
- ------------------------------------------------------------------------------
During 1996, the Company contributed the stock of Pafco and certain assets of
the Company totaling $17,186 to GGSH in exchange for a 52% ownership interest in
GGSH. In addition, Goldman Funds received a minority interest share of $18,425
in GGSH for its $21,200 contribution, resulting in a $2,775 increase to
additional paid-in capital from the sale of Pafco common stock and certain
assets.
20. Disclosures About Fair Values of Financial Instruments:
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of the Company's financial instruments.
Considerable judgment is required to develop these fair values and, accordingly,
the estimates shown are not necessarily indicative of the amounts that would be
realized in a one-time, current market exchange of all of the Company's
financial instruments.
a. Fixed Maturity and Equity Securities: Fair values for fixed maturity and
equity securities are based on quoted market prices.
-38-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
b. Mortgage Loan: The estimated fair value of the mortgage loan was
established using a discounted cash flow method based on credit rating,
maturity and future income when compared to the expected yield for
mortgages having similar characteristics. The estimated fair value of the
mortgage loan was $2,130 at December 31, 1997.
c. Short-term Investments, and Cash and Cash Equivalents: The carrying value
for assets classified as short-term investments, and cash and cash
equivalents in the accompanying Consolidated Balance Sheets approximates
their fair value.
d. Short-term Debt: The carrying value for short-term debt approximates fair
value.
e. Preferred Securities: The December 31, 1997 market value of the
Preferred Securities was $136,350 based on quoted market prices.
21. Segment Information:
The Company has two business segments: Nonstandard automobile and Crop
insurance. The Nonstandard automobile segment offers personal nonstandard
automobile insurance coverages through a network of independent general
agencies. These products are sold by Pafco in eleven states, Superior in nine
states, and IGF in four states. The Crop segment writes MPCI and crop hail
insurance in thirty-six states through independent agencies with its primary
concentration in the Midwest. Activity which is not included in the major
business segments is shown as "Corporate and Other."
"Corporate and Other" includes operations not directly related to the business
segments and unallocated corporate items (i.e., corporate investment income,
interest expense on corporate debt and unallocated overhead expenses).
Identifiable assets by business segment are those assets in the Company's
operations in each segment. Corporate and other assets are principally cash,
short-term investments, related-party assets, intangible assets, and property
and equipment. Capital expenditures are reported exclusive of the Acquisition.
-39-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
Segment information for 1995 through 1997 is as follows (certain information for
1995 is not available by segment due to general use by all segments of corporate
assets):
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Revenues:
- ----------------------------------------------------------------------------------------------------------
Nonstandard automobile $ 286,966 $ 181,799 $ 36,363
- ----------------------------------------------------------------------------------------------------------
Crop 25,731 24,865 12,830
- ----------------------------------------------------------------------------------------------------------
Corporate and other 317 99 3,447
------- ------- ------
- ----------------------------------------------------------------------------------------------------------
TOTAL REVENUE $ 313,014 $ 206,763 $ 52,640
======= ======= ======
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) before taxes and minority interest:
- ----------------------------------------------------------------------------------------------------------
Nonstandard automobile $ 18,603 $ 10,618 $ (1,989)
- ----------------------------------------------------------------------------------------------------------
Crop 20,862 17,685 11,040
- ----------------------------------------------------------------------------------------------------------
Corporate and other (5,522) (4,600) (1,611)
------- ------- ------
- ----------------------------------------------------------------------------------------------------------
TOTAL EARNINGS BEFORE TAXES AND
MINORITY INTEREST $ 33,943 $ 23,703 $ 7,440
======= ======= =======
- ----------------------------------------------------------------------------------------------------------
Identifiable assets:
- ----------------------------------------------------------------------------------------------------------
Nonstandard automobile $ 302,795 $ 260,332
- ----------------------------------------------------------------------------------------------------------
Crop 108,650 72,916
- ----------------------------------------------------------------------------------------------------------
Corporate and other 118,430 11,431
------- -------
- ----------------------------------------------------------------------------------------------------------
TOTAL IDENTIFIABLE ASSETS $ 529,875 $ 344,679
======= =======
- ----------------------------------------------------------------------------------------------------------
Depreciation and amortization:
- ----------------------------------------------------------------------------------------------------------
Nonstandard automobile $ 1,007 $ 1,209
- ----------------------------------------------------------------------------------------------------------
Crop 754 574
- ----------------------------------------------------------------------------------------------------------
Corporate and other 1,200 411
------- -------
- ----------------------------------------------------------------------------------------------------------
TOTAL DEPRECIATION AND AMORTIZATION $ 2,961 $ 2,194
======= =======
- ----------------------------------------------------------------------------------------------------------
Capital expenditures:
- ----------------------------------------------------------------------------------------------------------
Nonstandard automobile $ 4,409 $ 2,058
- ----------------------------------------------------------------------------------------------------------
Crop 1,241 1,676
- ----------------------------------------------------------------------------------------------------------
Corporate and other 12 -
------- -------
- ----------------------------------------------------------------------------------------------------------
TOTAL CAPITAL EXPENDITURES $ 5,662 $ 3,734
======= =======
- ----------------------------------------------------------------------------------------------------------
22. Stock Option Plans:
On November 1, 1996, the Company adopted the Symons International Group, Inc.
1996 Stock Option Plan (the "SIG Stock Option Plan"). The SIG Stock Option Plan
provides the Company authority to grant nonqualified stock options and incentive
-40-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
stock options to officers and key employees of the Company and its subsidiaries
and nonqualified stock options to nonemployee directors of the Company and
Goran. Options were granted at an exercise price equal to the Offering price of
the Company's common stock. The options granted to the Company's Chairman
(436,567 shares) vest and become exercisable in full on the first anniversary of
the grant date. All of the remaining outstanding stock options vest and become
exercisable in three equal installments on the first, second and third
anniversaries of the date of grant. All options were granted at an exercise
price equal to the fair market value of the Company's common stock at time of
grant.
Information regarding the SIG Stock Option Plan is summarized below:
1997 1996
Weighted Weighted
average average
exercise exercise
Shares price Shares price
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at the beginning of the year 830,000 $12.50 --- $ ---
- -----------------------------------------------------------------------------------------------------------------------------
Granted 185,267 15.35 830,000 12.50
- -----------------------------------------------------------------------------------------------------------------------------
Exercised (1,667) 12.50 --- ---
- -----------------------------------------------------------------------------------------------------------------------------
Forfeited (13,600) 12.50 --- ---
------- ---
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at the end of the year 1,000,000 $13.03 830,000 $12.50
========= =======
- -----------------------------------------------------------------------------------------------------------------------------
Options exercisable at year end 521,578 ---
- -----------------------------------------------------------------------------------------------------------------------------
Available for future grant --- 170,000
- -----------------------------------------------------------------------------------------------------------------------------
Options Options
Weighted outstanding exercisable
average weighted weighted
remaining average average
Number life (in exercise Number exercise
Range of exercise prices outstanding years) price exercisable price
- ---------------------------------------------------------------------------------------------------------------------------------
$12.50-$13.75 933,733 8.9 $12.66 521,578 $12.50
- ---------------------------------------------------------------------------------------------------------------------------------
$17.75-$19.25 66,267 9.7 18.23 --- ---
------ ---
- ---------------------------------------------------------------------------------------------------------------------------------
1,000,000 521,578
========= =======
- ---------------------------------------------------------------------------------------------------------------------------------
The Board of Directors of GGSH adopted the GGS Management Holdings, Inc. Stock
Option Plan (the "GGS Stock Option Plan"), effective April 30, 1996. The GGS
Stock Option Plan authorizes the granting of nonqualified and incentive stock
options to such officers and other key employees as may be designated by the
Board of Directors of GGSH. Options granted under the GGS Stock Option Plan have
a term of ten years and vest at a rate of 20% per year for the five years after
the date of the grant. The exercise price of any options granted under the GGS
Stock Option Plan shall be subject to the following formula: 50% of each grant
of options having an exercise price determined by the Board of Directors of GGSH
at its discretion, with the remaining 50% of each grant of options subject to a
compound annual increase in the exercise price of 10%, with a limitation on the
exercise price escalation as such options vest.
-41-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
Information regarding the GGS Stock Option Plan is summarized below:
1997 1996
Weighted Weighted
average average
exercise exercise
Shares price Shares price
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at the beginning of the year 55,972 $51.75 --- $ ---
- -----------------------------------------------------------------------------------------------------------------------------
Granted --- --- 55,972 51.75
- -----------------------------------------------------------------------------------------------------------------------------
Forfeited (1,950) 51.75 --- ---
------ ------
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at the end of the year 54,022 $51.75 55,972 $51.75
====== ======
- -----------------------------------------------------------------------------------------------------------------------------
Options exercisable at year end 10,804 ---
- -----------------------------------------------------------------------------------------------------------------------------
Available for future grant 57,089 55,139
- -----------------------------------------------------------------------------------------------------------------------------
Options Options
Weighted outstanding exercisable
average weighted weighted
remaining average average
Number life (in exercise Number exercise
Range of exercise prices outstanding years) price exercisable price
- ---------------------------------------------------------------------------------------------------------------------------
$44.17-$53.45 37,815 8.3 $46.13 10,804 $46.38
- ---------------------------------------------------------------------------------------------------------------------------
$58.79-$71.14 16,207 8.3 64.87 --- ---
------ ---
- ---------------------------------------------------------------------------------------------------------------------------
54,022 10,804
====== ======
- ---------------------------------------------------------------------------------------------------------------------------
The Company applies Accounting Principles Board Opinion No. 25, "Accounting of
Stock Issued to Employees" and related interpretation in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized for
such plans. Had compensation cost been determined, based on the fair value at
the grant dates for options granted under both the SIG Stock Option Plan and the
GGS Stock Option Plan during 1997 and 1996, consistent with the method of SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company's pro forma net
earnings and pro forma earnings per share for the years ended December 31, 1997
and 1996 would have been as follows:
- ---------------------------------------------------------------------------------------------
(Dollars in thousands, 1997 1997 1996 1996
except per share amounts) As Reported Pro forma As Reported Pro forma
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Net earnings $16,305 $14,927 $13,256 $13,021
- ---------------------------------------------------------------------------------------------
Basic earnings per share $1.56 $1.43 $1.76 $1.73
- ---------------------------------------------------------------------------------------------
Fully diluted earnings per share $1.52 $1.38 $1.76 $1.73
- ---------------------------------------------------------------------------------------------
The fair value of each option grant used for purposes of estimating the pro
forma amounts summarized above is estimated on the date of grant using the
Black-Scholes option-price model with the weighted average assumptions for 1997
and 1996 shown in the following table:
- --------------------------------------------------------------------------------------------
SIG SIG GGSH
1997 Grants 1996 Grants 1996 Grants
----------- ----------- -----------
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Risk-free interest rates 6.40% 6.27% 6.41%
- --------------------------------------------------------------------------------------------
Dividend yields --- --- ---
- ---------------------------------------------------------------------------------------------
Volatility factors 0.39 0.40 ---
- ---------------------------------------------------------------------------------------------
Weighted average expected life 3.3 years 3.1 years 5.0 years
- ---------------------------------------------------------------------------------------------
Weighted average fair value per share $5.54 $4.27 $5.90
- ---------------------------------------------------------------------------------------------
-42-
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
23. Subsequent Event:
On March 2, 1998, the Company announced that it had signed a definitive
agreement with CNA to purchase its multi-peril and crop hail operations. The
Company will reinsure back to CNA a small portion of the Company's total crop
book of business. CNA wrote approximately $110 million of multi-peril and crop
hail insurance business in 1997. Starting in the year 2000, assuming no event of
change of control as defined in the agreement, the Company can purchase the
insurance premiums reinsured to CNA through a call provision or CNA can require
the Company to buy the insurance premiums reinsured to CNA. Regardless of the
method of takeout of CNA, CNA must not compete in MPCI or crop hail for a period
of time after the buyout. The formula for the buyout is based on a multiple of
average pre-tax earnings that CNA receives from reinsuring the Company's book of
business.
24. Quarterly Financial Information (unaudited):
Quarterly financial information is as follows:
Quarters
- -------------------------------------------------------------------------------------------------------------------
1997 First Second Third Fourth Total
- -------------------------------------------------------------------------------------------------------------------
Gross written premiums $129,890 $149,175 $103,919 $77,616 $460,600
- -------------------------------------------------------------------------------------------------------------------
Net earnings 5,909 3,677 6,013 706 16,305
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share 0.56 0.35 0.56 0.09 1.56
- -------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per share 0.56 0.35 0.55 0.06 1.52
- -------------------------------------------------------------------------------------------------------------------
1996
- -------------------------------------------------------------------------------------------------------------------
Gross written premiums $41,422 $105,528 $71,813 $86,736 $305,499
- -------------------------------------------------------------------------------------------------------------------
Net earnings 1,586 2,718 4,589 4,363 13,256
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share 0.22 0.39 0.66 0.49 1.76
- -------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per share 0.22 0.39 0.66 0.49 1.76
- -------------------------------------------------------------------------------------------------------------------
1995
- -------------------------------------------------------------------------------------------------------------------
Gross written premiums $28,272 $67,487 $16,978 $11,897 $124,634
- -------------------------------------------------------------------------------------------------------------------
Net earnings 1,066 940 1,464 1,351 4,821
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share 0.15 0.14 0.21 0.19 0.69
- -------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per share 0.15 0.14 0.21 0.19 0.69
- -------------------------------------------------------------------------------------------------------------------
During the fourth quarter of 1997, the Company increased reserves on its
nonstandard automobile business by $1.5 million for accident years 1996 and
prior and by $1.5 million for accident year 1997.
As is customary in the crop insurance industry, insurance company participants
in the FCIC program receive more precise financial results from the FCIC in the
fourth quarter based upon business written on spring-planted crops. On the basis
of FCIC-supplied financial results, IGF recorded, in the fourth quarter, an
additional underwriting gain, net of reinsurance, on its FCIC business of
$6,979, $5,572 and $3,139 during 1997, 1996 and 1995, respectively.
-43-
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report which are not historical facts,
including but not limited to, statements concerning (i) the impact of federal
and state laws and regulations on the Company's business and results of
operations, (ii) the competitive advantage afforded to the Company's crop
insurance operations by approaches adopted by management in the areas of
information, technology, claims handling and underwriting, (iii) the
sufficiency of the Company's cash flow to meet the operating expenses, debt
service obligations and capital needs of the Company and its subsidiaries, and
(iv) the impact of declining MPCI Buy-up Expense Reimbursements on the Company's
results of operations, are forward-looking statements. The Company desires to
take advantage of the "safe harbor" afforded such statements under the
Private Securities Litigation Reform Act of 1995 when they are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those in the forward-looking
statements. Such cautionary statements which discuss certain risks associated
with the Company's business including the variability of the results of
operations of the Company's crop insurance business as a result of weather and
natural perils, the highly competitive nature of both the Company's crop
insurance and nonstandard automobile insurance business and the effects of state
and federal regulation, the capital intensive nature of the property and
casualty business and potential limitations on the ability of the Company to
raise additional capital set forth under the heading "Forward-Looking Statements
- --Safe Harbor Provisions" in Item 1 - Business in the Company's Annual Report on
Form 10-K for the Year Ended December 31, 1997.
- -------------------------------------------------------------------------------
MANAGEMENT RESPONSIBILITY
- --------------------------------------------------------------------------------
Management recognizes its responsibility for conducting the Company's affairs in
the best interests of all its shareholders. The consolidated financial
statements and related information in this Annual Report are the responsibility
of management. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which involve the use
of judgement and estimates in applying the accounting principles selected. Other
financial information in this Annual Report is consistent with that in the
consolidated financial statements.
The Company maintains systems of internal controls which are designed to provide
reasonable assurance that accounting records are reliable and to safe-guard the
Company's assets. The independent accounting firm of Coopers & Lybrand L.L.P.
has audited and reported on the Company's financial statements. Their opinion is
based upon audits conducted by them in accordance that the consolidated
financial statements are free of material misstatements.
The Audit Committee of the Board of Directors, the members of which include
outside directors, meets with the independent external auditors and management
representative to review the internal accounting controls, the consolidated
financial statements and other financial reporting matters. In addition to
having unrestricted access to the books and records of the Company, the
independent external auditors also have unrestricted access to the Audit
Committee. The Audit Committee reports its findings and makes recommendations to
the Board of Directors.
/s/ Alan G. Symons
Chief Executive Officer
/s/ Gary P. Hutchcraft
Gary P. Hutchcraft
Vice President and Chief Financial Officer
February 27, 1998
-44-
[small SIG logo]
REPORTS OF INDEPENDENT ACCOUNTANTS
Board of Directors And Stockholders of Symons International Group, Inc.
And Subsidiaries
We have audited the accompanying consolidated balance sheets of Symons
International Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of earnings, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Symons
International Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand
Indianapolis, Indiana
February 27, 1998 , except as to note 23
which is as of March 2, 1998
-45-
[small SIG logo]
Stockholder Information
Corporate Offices
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
(317) 259-6300
Registrar and Transfer Agent
National City Bank
4100 West 150th Street
3rd Floor
Cleveland, Ohio 44135-1385
Independent Public Accountants
Coopers & Lybrand L.L.P.
Indianapolis, Indiana
Annual Meeting of Stockholders
Wednesday, May 20, 1998
10:00 a.m.
Corporate Offices
Annual Report on Form 10-K
A copy of the Annual Report on Form 10-K for Symons International Group, Inc.
for the year ended December 31, 1997, filed with the Securities and Exchange
Commission, may be obtained, without charge, upon request to the individual and
address noted under Shareholder Inquiries.
Market and Dividend Information
Symons International Group, Inc. effected its initial public offering on
November 5, 1996. Symons International Group, Inc.'s common stock trades on the
NASDAQ Stock Market's National Market under the symbol SIGC. The initial
offering price of its shares of Common Stock was $12.50 per share.
NASDAQ
- ---------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------
Quarter Ended High Low High Low
- ---------------------------------------------------------------------
March 31 17.625 14.00 N/A N/A
- ---------------------------------------------------------------------
June 30 16.625 13.625 N/A N/A
- ---------------------------------------------------------------------
September 30 23.25 15.75 N/A N/A
- ---------------------------------------------------------------------
December 31 23.75 18.63 16.75 12.50
- ---------------------------------------------------------------------
As of March 20, 1998, the Company had approximately 120 stockholders based on
the number of holders of record and an estimate of the number of individual
participants represented by securities position listings.
Symons International Group, Inc. did not declare or pay cash dividends on its
common stock during the years ended December 31, 1997 and 1996. The Company does
not plan to pay cash dividends on its common stock in order to retain earnings
to support the growth of its business.
Shareholder Inquiries
Inquiries should be directed to:
Alan G. Symons
Chief Executive Officer
Symons International Group, Inc.
Tel: (317) 259-6402
-46-
[small SIG logo]
Board of Directors
G. Gordon Symons
Chairman of the Board
Symons International Group, Inc.
Goran Capital Inc.
Alan G. Symons
Chief Executive Officer, Symons International Group, Inc.
President and Chief Executive Officer, Goran Capital Inc.
Douglas H. Symons
President and Chief Operating Officer, Symons International Group, Inc.
Vice President and Chief Operating Officer, Goran Capital Inc.
John K. McKeating
Retired former President and Owner of Vision 2120 Optometric Clinics
Robert C. Whiting
President, Prime Advisors, Ltd
James G. Torrance, Q.C.
Partner Emeritus, Smith, Lyons
Barristers & Solicitors
David R. Doyle
Director and Vice President, Secretary and
Treasurer of ONEX, Inc.
Jerome B. Gordon
Managing Director of Lutine Corporation
Executive Officers
G. Gordon Symons Roger C. Sullivan Jr.
Chairman of the Board Executive Vice President
Symons International Group, Inc. Superior Insurance Company
Alan G. Symons David L. Bates
Chief Executive Officer Vice President, General Counsel and
Symons International Group, Inc. and Secretary
Symons International Group, Inc.
Douglas H. Symons Dennis G. Daggett
President and Chief Operating Officer President and Chief Operating Officer
Symons International Group, Inc. IGF Insurance Company
Gary P. Hutchcraft Thomas F. Gowdy
Vice President, Chief Financial Officer Executive Vice Presidenter
and Treasurer IGF Insurance Company
Symons International Group, Inc.
Carl F. Schnaufer
Vice President, Chief Information Officer
Symons International Group, Inc.
Donald E. Barrett
Vice President, Human Resources
Symons International Group, Inc.
Terry E. Diers
Vice President, Marketing
GGS Management, Inc.
-47-
[small SIG logo]
Company, Subsidiaries and Branch Offices
CORPORATE OFFICE
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317 259-6300
Fax: 317 259-6395
SUBSIDIARIES AND BRANCHES
Pafco General Insurance Company IGF Southwest
4720 Kingsway Drive 7914 Abbeville Avenue
Indianapolis, Indiana 46205 Lubbock, Texas 79424
Tel: 317 259-6300 Tel: 806 783-3010
Fax: 317 259-6395 Fax: 806 783-3017
Superior Insurance Company IGF South
280 Interstate North Circle, N.W. 101 Business Park Drive, Suite C
Atlanta, Georgia 30339 Jackson, Mississippi 39213
Tel: 770 952-4885 Tel: 601 957-9780
Fax: 770 952-6616 Fax: 601 957-9793
Superior Insurance Company IGF East
3030 N. Rocky Point Drive 8000 Regency Park, Suite 280
Suite 770 Cary, North Carolina 27511
Tampa, Florida 33607 Tel: 919 462-7850
Tel: 813 281-2444 Fax: 919 462-7863
Fax: 813 281-8036
IGF West
Superior Insurance Company 1750 Bullard Avenue, Suite 106
1745 West Orangewood Road Fresno, California 93710
Orange, California 92868 Tel: 209 432-0196
Tel: 714 978-6811 Fax: 209 432-0294
Fax: 714 978-0353
IGF North
IGF Insurance Company 116 South Main, Box 1090
Corporate Office Stanley, North Dakota 58784
6000 Grand Avenue Tel: 701 628-3536
Des Moines, Iowa 50312 Fax: 701 628-3537
Tel: 515 633-1000
Fax: 515 633-1010
IGF Mid West
6000 Grand Avenue
Des Moines, Iowa 50312
Tel: 515 633-1000
Fax: 515 633-1012
IGF Mid East
3900 Wood Duck Drive, Suite B
Springfield, Illinois 62707
Tel: 217 726-2450
Fax: 217 726-2451
-48-
BACK PAGE
[SIG logo]
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395